IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpfi/0412009.html
   My bibliography  Save this paper

Why Individual Investors Want Dividends

Author

Listed:
  • Ming Dong

    (York University - Schulich School of Business)

  • Chris Robinson

    (York University - Atkinson School of Administrative Studies)

  • Chris Veld

    (Simon Fraser University - Faculty of Business Administration)

Abstract

The question of why individual investors want dividends is investigated by submitting a questionnaire to a Dutch investor panel. The respondents indicate that they want dividends partly because the cost of cashing in dividends is lower than the cost of selling shares. Their answers provide strong confirmation for the signaling theories of Bhattacharya (1979) and Miller and Rock (1985). They are inconsistent with the uncertainty resolution theory of Gordon (1961, 1962) and the agency theories of Jensen (1986) and Easterbrook (1984). The behavioral finance theory of Shefrin and Statman (1984) is not confirmed for cash dividends but is confirmed for stock dividends. Finally, our results indicate that individual investors do not tend to consume a large part of their dividends. This raises some doubt as to whether a reduction or elimination of dividend taxes will stimulate the economy.

Suggested Citation

  • Ming Dong & Chris Robinson & Chris Veld, 2004. "Why Individual Investors Want Dividends," Finance 0412009, EconWPA.
    • Handle: RePEc:wpa:wuwpfi:0412009
    Note: Type of Document - pdf; pages: 53
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0412/0412009.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eugene F. Fama & Kenneth R. French, 2001. "Disappearing Dividends: Changing Firm Characteristics Or Lower Propensity To Pay?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(1), pages 67-79.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    4. Ikenberry, David & Lakonishok, Josef & Vermaelen, Theo, 1995. "Market underreaction to open market share repurchases," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 181-208.
    5. Ariane Chapelle & Marco Becht, 1997. "Ownership and control in Belgium," ULB Institutional Repository 2013/9979, ULB -- Universite Libre de Bruxelles.
    6. Jagannathan, Murali & Stephens, Clifford P. & Weisbach, Michael S., 2000. "Financial flexibility and the choice between dividends and stock repurchases," Journal of Financial Economics, Elsevier, vol. 57(3), pages 355-384, September.
    7. Gustavo Grullon & Roni Michaely, 2002. "Dividends, Share Repurchases, and the Substitution Hypothesis," Journal of Finance, American Finance Association, vol. 57(4), pages 1649-1684, August.
    8. David Ikenberry & Josef Lakonishok & Theo Vermaelen, 2000. "Stock Repurchases in Canada: Performance and Strategic Trading," Journal of Finance, American Finance Association, vol. 55(5), pages 2373-2397, October.
    9. Goergen, Marc & Renneboog, Luc & Correia da Silva, Luis, 2005. "When do German firms change their dividends?," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 375-399, March.
    10. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier.
    11. Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
    12. Gugler, Klaus, 2003. "Corporate governance, dividend payout policy, and the interrelation between dividends, R&D, and capital investment," Journal of Banking & Finance, Elsevier, vol. 27(7), pages 1297-1321, July.
    13. Joan Farre-Mensa & Roni Michaely & Martin Schmalz, 2014. "Payout Policy," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 75-134, December.
      • Allen, Franklin & Michaely, Roni, 2003. "Payout policy," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 7, pages 337-429 Elsevier.
    14. Brav, Alon & Graham, John R. & Harvey, Campbell R. & Michaely, Roni, 2005. "Payout policy in the 21st century," Journal of Financial Economics, Elsevier, vol. 77(3), pages 483-527, September.
    15. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    16. Abe de Jongand & Rezaul Kabir & Teye Marra & Ailsa Roell, 1999. "Ownership and Control in the Netherlands," Working Papers 1999.22, Fondazione Eni Enrico Mattei.
    17. Litzenberger, Robert H & Ramaswamy, Krishna, 1982. " The Effects of Dividends on Common Stock Prices: Tax Effects or Information Effects?," Journal of Finance, American Finance Association, vol. 37(2), pages 429-443, May.
    18. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    19. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 609-643, October.
    20. de Jong, Abe & van Dijk, Ronald & Veld, Chris, 2003. "The dividend and share repurchase policies of Canadian firms: empirical evidence based on an alternative research design," International Review of Financial Analysis, Elsevier, vol. 12(4), pages 349-377.
    21. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
    22. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    23. Donkers, Bas & Melenberg, Bertrand & Van Soest, Arthur, 2001. "Estimating Risk Attitudes Using Lotteries: A Large Sample Approach," Journal of Risk and Uncertainty, Springer, vol. 22(2), pages 165-195, March.
    24. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    25. Shefrin, Hersh M. & Statman, Meir, 1984. "Explaining investor preference for cash dividends," Journal of Financial Economics, Elsevier, vol. 13(2), pages 253-282, June.
    26. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    27. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    28. Black, Fischer & Scholes, Myron, 1974. "The effects of dividend yield and dividend policy on common stock prices and returns," Journal of Financial Economics, Elsevier, vol. 1(1), pages 1-22, May.
    29. H. Baker & Gary Powell & E. Veit, 2002. "Revisiting managerial perspectives on dividend policy," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 26(3), pages 267-283, September.
    30. Gugler, Klaus & Yurtoglu, B. Burcin, 2003. "Corporate governance and dividend pay-out policy in Germany," European Economic Review, Elsevier, vol. 47(4), pages 731-758, August.
    31. Comment, Robert & Jarrell, Gregg A, 1991. " The Relative Signalling Power of Dutch-Auction and Fixed-Price Self-Tender Offers and Open-Market Share Repurchases," Journal of Finance, American Finance Association, vol. 46(4), pages 1243-1271, September.
    32. Donkers, Bas & van Soest, Arthur, 1999. "Subjective measures of household preferences and financial decisions," Journal of Economic Psychology, Elsevier, vol. 20(6), pages 613-642, December.
    33. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-659, September.
    34. Werner F. M. De Bondt & Richard H. Thaler, 1994. "Financial Decision-Making in Markets and Firms: A Behavioral Perspective," NBER Working Papers 4777, National Bureau of Economic Research, Inc.
    35. Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-790, July.
    36. Winnett, Adrian & Lewis, Alan, 1995. "Household accounts, mental accounts, and savings behaviour: Some old economics rediscovered?," Journal of Economic Psychology, Elsevier, vol. 16(3), pages 431-448, September.
    37. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Huang-Meier, Winifred & Freeman, Mark C., 2015. "Aggregate dividends and consumption smoothing," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 324-335.
    2. Tom Van Caneghem & Walter Aerts, 2011. "Intra-industry conformity in dividend policy," Managerial Finance, Emerald Group Publishing, vol. 37(6), pages 492-516, May.
    3. Aerts, Walter & Campenhout, Geert Van & Caneghem, Tom Van, 2008. "Clustering in dividends: Do managers rely on cognitive reference points?," Journal of Economic Psychology, Elsevier, vol. 29(3), pages 276-284, June.
    4. Mori, Naoya & Ikeda, Naoshi, 2015. "Majority support of shareholders, monitoring incentive, and dividend policy," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 1-10.
    5. Lee, Boram & Veld-Merkoulova, Yulia, 2016. "Myopic loss aversion and stock investments: An empirical study of private investors," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 235-246.
    6. Krieger, Kevin & Lee, Bong-Soo & Mauck, Nathan, 2013. "Do senior citizens prefer dividends? Local clienteles vs. firm characteristics," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 150-165.
    7. repec:gei:jnlfer:v:1:y:2016:i:2:p:71-86 is not listed on IDEAS
    8. Kuzucu, Narman, 2015. "A survey of managerial perspective on corporate dividend policy: evidence from Turkish listed firms," MPRA Paper 69801, University Library of Munich, Germany.
    9. P. Du Jardin & E. Séverin, 2011. "Dividend policy," Post-Print hal-00801923, HAL.
    10. David, Thomas & Ginglinger, Edith, 2016. "When cutting dividends is not bad news: The case of optional stock dividends," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 174-191.
    11. Korkeamaki, Timo & Liljeblom, Eva & Pasternack, Daniel, 2010. "Tax reform and payout policy: Do shareholder clienteles or payout policy adjust?," Journal of Corporate Finance, Elsevier, vol. 16(4), pages 572-587, September.
    12. Sheng Guo & William Hardin, 2015. "Financial and Housing Wealth, Expenditures and the Dividend to Ownership," Working Papers 1506, Florida International University, Department of Economics.
    13. 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.
    14. Veld-Merkoulova, Yulia V., 2011. "Investment horizon and portfolio choice of private investors," International Review of Financial Analysis, Elsevier, vol. 20(2), pages 68-75, April.
    15. Veld, Chris & Veld-Merkoulova, Yulia V., 2008. "The risk perceptions of individual investors," Journal of Economic Psychology, Elsevier, vol. 29(2), pages 226-252, April.
    16. André Schmidt, 2017. "Determinants of Corporate Voting – Evidence from a Large Survey of German Retail Investors," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 18(1), pages 71-103, February.
    17. Thitima Sitthipongpanich, 2016. "The influence of the CEO and the largest shareholder on dividend payout policy in Thailand," Proceedings of Business and Management Conferences 3405493, International Institute of Social and Economic Sciences.
    18. Sheng Guo & William G. Hardin, 2017. "Financial and Housing Wealth, Expenditures and the Dividend to Ownership," The Journal of Real Estate Finance and Economics, Springer, vol. 54(1), pages 58-96, January.
    19. Akhtar, Muhammad Naeem & Hunjra, Ahmed Imran & Andleeb, Arifa & Butt, Babar Zaheer, 2011. "Individual investors perception of dividends: Pakistan’s percpective," MPRA Paper 40682, University Library of Munich, Germany.
    20. repec:ksp:journ5:v:5:y:2018:i:1:p:12-41 is not listed on IDEAS
    21. Jasim Al-Ajmi, 2009. "Investors' use of corporate reports in Bahrain," Managerial Auditing Journal, Emerald Group Publishing, vol. 24(3), pages 266-289, March.

    More about this item

    Keywords

    Dividends; individual investors; survey;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0412009. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA). General contact details of provider: http://econwpa.repec.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.