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The Effect of Dividends on Consumption

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  • Malcolm Baker

    (Harvard University)

  • Stefan Nagel

    (Stanford University)

  • Jeffrey Wurgler

    (New York University)

Abstract

In classical models the division of stock returns into dividends and capital gains has no "real" consequence for investor consumption. This paper, using two micro data sets that provide cross-sectional variation in dividend receipts and capital gains, empirically measures the effect of dividends on investor consumption. Analysis of data from the Consumer Expenditure Survey indicates that household consumption is particularly sensitive to realized dividend income, when one controls for total portfolio returns including dividends. Analysis of data from a discount brokerage shows that dividends are withdrawn from household portfolios at a much higher rate than capital gains, further suggesting that the form of returns matters for consumption and that investors pursue a mental accounting strategy to "consume income, not principal." Finally, the paper discusses what these estimates imply for the response of aggregate consumption to the May 2003 dividend tax cuts in the United States.

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Bibliographic Info

Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 38 (2007)
Issue (Month): 1 ()
Pages: 231-292

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Handle: RePEc:bin:bpeajo:v:38:y:2007:i:2007-1:p:231-292

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Keywords: dividends; consumption; macroeconomics; capital gains;

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References

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Citations

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Cited by:
  1. Lee, King Fuei, 2013. "Demographics and the long-horizon returns of dividend-yield strategies," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 202-218.
  2. Jeffrey Thompson & Timothy M. Smeeding, 2010. "Recent Trends in the Distribution of Income: Labor, Wealth and More Complete Measures of Well Being," Working Papers wp225, Political Economy Research Institute, University of Massachusetts at Amherst.
  3. Whitaker, James B. & Effland, Anne, 2009. "Income Stabilization Through Government Payments: How Is Farm Household Consumption Affected?," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 38(1), April.
  4. Xavier Gabaix, 2011. "A Sparsity-Based Model of Bounded Rationality," NBER Working Papers 16911, National Bureau of Economic Research, Inc.
  5. Katherine L. Milkman & John L. Beshears, 2007. "Mental Accounting and Small Windfalls: Evidence from an Online Grocer," Harvard Business School Working Papers 08-024, Harvard Business School, revised Sep 2008.
  6. Isakov, Dusan & Weisskopf, Jean-Philippe, 2013. "Do not wake sleeping dogs: Pay-out policies in founding family firms," FSES Working Papers 443, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
  7. Jan Behringer & Till van Treeck, 2013. "Income Distribution and the Current Account: A Sectoral Perspective," INET Research Notes 35, Institute for New Economic Thinking (INET).
  8. Kaustia, Markku & Rantapuska, Elias, 2012. "Rational and behavioral motives to trade: Evidence from reinvestment of dividends and tender offer proceeds," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2366-2378.
  9. Olivier Allain, 2011. "The impact of income distribution on consumption: a reassessment," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00712657, HAL.

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