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The Effect of Dividends on Consumption

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Author Info
Malcolm Baker
Stefan Nagel
Jeffrey Wurgler

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Abstract

Classical models predict that the division of stock returns into dividends and capital appreciation does not affect investor consumption patterns, while mental accounting and other economic frictions predict that investors have a higher propensity to consume from stock returns in the form of dividends. Using two micro data sets, we show that investors are indeed far more likely to consume from dividends than capital gains. In the Consumer Expenditure Survey, household consumption increases with dividend income, controlling for total wealth, total portfolio returns, and other sources of income. In a sample of household investment accounts data from a brokerage, net withdrawals from the accounts increase one-for-one with ordinary dividends of moderate size, controlling for total portfolio returns, and also increase with mutual fund and special dividends. We comment on several potential explanations for the results.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12288.

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Date of creation: Jun 2006
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Handle: RePEc:nbr:nberwo:12288

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Find related papers by JEL classification:
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
G3 - Financial Economics - - Corporate Finance and Governance
D1 - Microeconomics - - Household Behavior

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References listed on IDEAS
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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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