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Clustering in dividends: Do managers rely on cognitive reference points?

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  • Aerts, Walter
  • Campenhout, Geert Van
  • Caneghem, Tom Van
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    Abstract

    Prior studies (see e.g. [Rosch, E. (1975). Cognitive reference points. Cognitive Psychology, 7, 532-547]) indicate that multiples of ten serve as cognitive reference points with a view to perceiving and evaluating numbers. In order to explore whether managers set dividends per share (henceforth DPS) at or just above a cognitive reference point, we perform a digital analysis on US firms' DPS for the period 1995-2004. That is, based on the theory of cognitive reference points, DPS of $2.00 will be viewed as being abnormally larger than DPS of $1.99, whereas the actual difference only amounts to a marginal $0.01. Results presented in this paper indicate that managers fall back on cognitive reference points when they set DPS, which shows in significantly more (fewer) zeroes (large digits) in the second-from-the-left position of DPS than would normally be expected. Overall, results presented in this paper tally with prior findings on odd-ending prices and price clustering documented in related disciplines.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Psychology.

    Volume (Year): 29 (2008)
    Issue (Month): 3 (June)
    Pages: 276-284

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    Handle: RePEc:eee:joepsy:v:29:y:2008:i:3:p:276-284

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    Web page: http://www.elsevier.com/locate/joep

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    Cited by:
    1. Malcolm Baker & Jeffrey Wurgler, 2012. "Dividends as Reference Points: A Behavioral Signaling Approach," NBER Working Papers 18242, National Bureau of Economic Research, Inc.

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