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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 Analysis of data from a discount brokerage shows that dividends are withdrawn from household portfolios at a much higher rate than capital gains, further suggesting that the form of returns matters for consumption and that investors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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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, Elsevier, vol. 53(2), pages 202-218.
  2. 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, Northeastern Agricultural and Resource Economics Association, vol. 38(1), April.
  3. Breuer, Wolfgang & Rieger, M. Oliver & Soypak, K. Can, 2014. "The behavioral foundations of corporate dividend policy a cross-country analysis," Journal of Banking & Finance, Elsevier, Elsevier, vol. 42(C), pages 247-265.
  4. 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, Elsevier, vol. 36(8), pages 2366-2378.
  5. Jeffrey Thompson & Timothy M. Smeeding, 2010. "Recent Trends in the Distribution of Income: Labor, Wealth and More Complete Measures of Well Being," Working Papers, Political Economy Research Institute, University of Massachusetts at Amherst wp225, Political Economy Research Institute, University of Massachusetts at Amherst.
  6. Milkman, Katherine L. & Beshears, John, 2009. "Mental accounting and small windfalls: Evidence from an online grocer," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 71(2), pages 384-394, August.
  7. Xavier Gabaix, 2011. "A Sparsity-Based Model of Bounded Rationality," NBER Working Papers 16911, National Bureau of Economic Research, Inc.
  8. Olivier Allain, 2011. "The impact of income distribution on consumption: a reassessment," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers), HAL hal-00712657, HAL.
  9. Isakov, Dusan & Weisskopf, Jean-Philippe, 2013. "Do not wake sleeping dogs: Pay-out policies in founding family firms," FSES Working Papers, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland 443, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
  10. Jan Behringer & Till van Treeck, 2013. "Income Distribution and the Current Account: A Sectoral Perspective," INET Research Notes, Institute for New Economic Thinking (INET) 35, Institute for New Economic Thinking (INET).

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