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The Effect of Dividends on Consumption

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Author Info
Malcolm Baker (Harvard University)
Stefan Nagel (Stanford University)
Jeffrey Wurgler (New York University)

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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 Analysis of data from a discount brokerage shows that dividends are withdrawn from household portfolios at a much higher rate than capital gains, further suggesting that the form of returns matters for consumption and that investors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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Publisher Info
Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 38 (2007)
Issue (Month): 2007-1 ()
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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Related research
Keywords: dividends; consumption; macroeconomics; capital gains;

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Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
  2. 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. [Downloadable!]
    Other versions:
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