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Journal Article•DOI•

Why individual investors want dividends

Ming Dong1, Chris Robinson1, Chris Veld2•
York University1, Simon Fraser University2
01 Dec 2005-Journal of Corporate Finance (Elsevier)-Vol. 12, Iss: 1, pp 121-158
TL;DR: In this paper, the question of why individual investors want dividends was investigated by submitting a questionnaire to a Dutch investor panel, and the respondents indicated that they want dividends partly because the cost of cashing in dividends is lower than the cost for selling shares.
About: This article is published in Journal of Corporate Finance.The article was published on 2005-12-01 and is currently open access. It has received 81 citations till now. The article focuses on the topics: Dividend policy & Corporate finance.

Summary (3 min read)

Jump to: [1. Introduction] – [2. Theories on Why Investors Want Cash Dividends] – [3. Theories on Why Investors Want Stock Dividends] – [4.1. Survey Methods and CentER Panel] – [4.2. The Questionnaire] – [4.3. Statistical Inference] – [5.1. Overview of Survey Respondents] – [5.2. Results for Cash Dividends] – [5.3. Results on Stock Dividends] – [5.4. Robustness Checks] and [6. Summary and conclusions]

1. Introduction

  • The authors test their validity as descriptions of investor behavior with direct survey research conducted on a sample of Dutch household members who constitute a voluntary panel that answers personal survey questionnaires on family financial and consumer matters every week.
  • Section 5 describes survey results and discusses how they relate to their hypotheses.

2. Theories on Why Investors Want Cash Dividends

  • A. The Miller and Modigliani (1961) dividend irrelevance theory Miller and Modigliani (1961) show that in a perfect and complete capital market the dividend policy of a firm does not affect its value.
  • It is interesting to notice that Fuller and Goldstein (2003) conclude that dividend-paying stocks have higher returns than non-dividend paying stocks, and that this effect is especially strong in declining markets.
  • De Jong et al. (2004) provide more discussion of this system and its effects on share value.
  • The authors therefore believe that there is substantial information asymmetry between management and shareholders in the Netherlands.
  • In the old tax system prevailing before January 1, 2001, dividends were treated as ordinary income and were taxed at a progressive rate.

3. Theories on Why Investors Want Stock Dividends

  • An issue that is closely related to that of cash dividends is the question of why some companies “pay” stock dividends.
  • Stock dividends may have an advantage over cash dividends because they may carry lower transaction costs.
  • An investor holding 113 shares might receive one share for 100 stock dividends.
  • Stock dividends are nothing more than a stock split and should not be taxed in the first place.
  • They argue that stock dividends are labeled as dividends.

4.1. Survey Methods and CentER Panel

  • The authors surveyed individual investors to test the theories discussed in the previous two sections.
  • Surveys complement research based on large samples and clinical studies, particularly for a question like dividend policy where the beliefs of investors are the basis for most of the theoretical models.
  • The first is that the respondents may not be representative of the population.
  • If the household does not have a television, CentERdata provides one.
  • Information about the panel can be found at http://www.centerdata.uvt.nl.

4.2. The Questionnaire

  • The authors have made large efforts to avoid the potential problems that are associated with the use of surveys.
  • First, the problem that the respondents may not be representative of the population is avoided by the use of the CentER panel.
  • The confidential nature of the respondent database precludes us interviewing any of them.
  • Therefore the questions have to be couched in plain, unambiguous language that the respondents understand.
  • Questions 1-4 determine whether the respondents own, or have owned within the last three years, shares in companies and/or investment funds.

4.3. Statistical Inference

  • These responses are both presented for the whole sample and for sub-samples according to demographic statistics, i.e., age, income and education.
  • From these interviews, the researcher creates one or more hypotheses about behavior that she can test on larger numbers of subjects or sites.
  • 17 For Questions 5-32, the authors test whether the mean and median responses are significantly different from the neutral response, and whether the responses from demographic groups are significantly different.
  • The authors still use a non-parametric two-sample test for the median responses.
  • For the difference in mean between demographic groups, the authors use a Z-test for the difference in proportions.

5.1. Overview of Survey Respondents

  • For this purpose all panel members of 16 years and older were selected.
  • These results are available on request from the authors.
  • Figure 1 gives the demographic distributions of the survey respondents.
  • It can be concluded from Figure 1 that on average investors are older, have higher income and are better educated than non-investors, which is what the authors would expect.
  • The second additional survey was submitted to the panel in the weekend of March 13, 2004.

5.2. Results for Cash Dividends

  • 19 Table 2 includes the responses to the questions on cash dividends.
  • The results indicate that individual investors do not see dividends as a way to control for possible overinvestment tendencies by management.
  • Both the mean and the median are significantly different from 4. Brav et al. (2004) try to find out from the executives why individual investors want dividends.

5.3. Results on Stock Dividends

  • The first question in Table 5 asks whether respondents consider stock dividends to be more like stock splits (response possibility 7) or like cash dividends (response possibility 1).
  • The median is significantly different from four at the 5% level.
  • The differences in scores between the different education and income groups are also not significant.
  • The second question on stock dividends (Question 29) shows that when only considering transaction costs, on average, investors prefer stock dividends compared to cash dividends.
  • All sub-samples for this question show a score that is significantly higher than 4.

5.4. Robustness Checks

  • Answers by respondents who do not want to receive dividends or who are indifferent may not be valid in testing theories of why dividends are relevant.
  • No a priori theoretical or empirical basis exists for this distinction, but it does seem possible.
  • The authors believe that investors, who prefer not to receive dividends or are indifferent, should still have valid opinions on the theories for and against dividends, since they are equally part of the market for shares.
  • The authors tested to see if this potentially confounding effect exists.
  • The results display a similar pattern to those in Tables 2-5, and so the authors have not reproduced them here.

6. Summary and conclusions

  • Most of the finance theory on dividend policy starts with the behavior of shareholders.
  • The empirical finance literature on this topic either studies share price reactions or surveys corporate executives for their opinions.
  • The authors received 555 responses from consumers that have, or recently had, investments in stocks of individual companies or investment funds.
  • The authors find that investors have a strong preference to receive dividends.
  • The results are inconsistent with the agency theories of Easterbrook (1984) and Jensen (1986).

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Journal Article•DOI•
Powerful CEOs and Corporate Governance

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Mark Humphery-Jenner, Emdad Islam, Lubna Abdul Rahman, Jo-Ann Suchard
06 Feb 2022-Journal of Empirical Legal Studies
TL;DR: In this paper , the Sarbanes-Oxley Act and NYSE/NASDAQ listing rules were used to analyze whether improved governance helps to channel firms with powerful CEOs toward more value-enhancing corporate policies.
Abstract: Excessive CEO power is often regarded as value-destroying. We use a quasi-exogenous regulatory shock to analyze whether improved governance helps to channel firms with powerful CEOs toward more value-enhancing corporate policies. We use the Sarbanes-Oxley Act and NYSE/NASDAQ listing rules and focus on firms that were required to improve governance. We find that postregulation firms led by powerful CEOs increase innovation inputs (Research and Development expenditures) and produce more innovation outputs (patents) that are scientifically more important (citations) and economically more valuable (market value of patents). Investment quality also improves, manifesting in better takeover performance and improvements in firm performance and corporate value. Our results suggest that improved governance can mitigate value destruction in powerful CEO-managed firms. We take steps to mitigate econometric concerns and ensure our results are robust to various combinations of fixed effects and control variables.

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The impacts of recent tax legislation on dividend policy and investment

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George Ryan Huston
01 Jan 2007
TL;DR: Huston et al. as mentioned in this paper examined firms' reactions to two changes in tax law intended to increase dividend payout and capital investment, the Job Creation and Worker Assistance Act (JCWAA) of 2002 and the Jobs Growth Tax Relief Reconciliation Act (JGTRRA) of 2003.
Abstract: The Impacts of Recent Tax Legislation on Dividend Policy and Investment. (May 2007) George Ryan Huston, B.B.A.; M.S., Texas A&M University Chair of Advisory Committee: Dr. Michael Kinney This dissertation examines firms’ reactions to two changes in tax law intended to increase dividend payout and capital investment, the Job Creation and Worker Assistance Act (JCWAA) of 2002 and the Jobs Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. Chapter IV assesses whether firms assuage agency conflicts between management and shareholders created by changes in individual-level taxes on dividends, focusing on the impact of board independence on changes in management compensation and dividend policies. Data analyses suggest that greater board independence mitigates the effects of both CEO stock and option holdings on dividend increases. Additionally, firms appear to implicitly dividend-protect options through increased cash compensation, effectively reimbursing CEOs for decreases in option value. Firms that did not increase dividends in the first year following the passage of JGTRRA decreased option grants to induce greater future dividend payouts. Chapter V examines the relation between contemporary dividend increases and future earnings around JGTRRA. Specifically, I investigate whether firms increase dividends in response to shareholder demands, and I examine the market reaction to preand post-JGTRRA dividend changes. In addition, I focus on the dividend policies of

2 citations

Dissertation•DOI•
Essays on corporate dividend policy: Chinese evidence

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Rulu Pan
05 Jun 2015
TL;DR: In this article, the authors examined the effect of dividends in the Chinese capital market and further investigated the factors that significantly affect dividend policy in Chinese listed firms, concluding that the increased use of dividends among constrained firms is driven by the desire to enhance public financing capacity.
Abstract: The thesis examines the dividend puzzle in the context of the Chinese capital market and further investigates the factors that significantly affect dividend policy in Chinese listed firms. In Chapter two, we examine the announcement effects of dividends in the Chinese capital market, with an emphasis on stock dividends. We begin by separately investigating the cumulative abnormal returns around the announcements of cash, stock and combined dividends. Because earnings are announced concurrently with dividend decisions in China, and therefore the estimated abnormal returns could be confounded by the earnings effect, we attempt to examine the dividend announcement effect under different earnings signals. We find a strong announcement effect of stock dividends even after controlling for concurrent earnings surprises. In contrast, pure cash dividend stocks experience no significant price run-up around the announcements. In addition, we examine the difference in market reactions to a positive or negative earnings announcement as firms initiate, maintain or switch to different forms of payouts. It appears that switching from other types of dividends to stock dividends reinforces the earnings signal. Chapter three examines the effect of corporate governance and stock liquidity on corporate payout policy in the context of the split-share structure reform initiated in China in 2005. Under this reform, non-tradable shares were compulsorily converted into tradable shares. The reform removed a liquidity constraint; it also facilitated better alignment of the interests of controlling shareholders with those of outside investors. These changes led to significant improvements in firms’ share liquidity and governance. We investigate the implications of share reform-induced governance and liquidity improvements for corporate dividend policy. First, we examine how listed firms’ dividend policy responds to a governance and liquidity shock (i.e., the split-share structure reform) by comparing corporate dividend policy before and after the reform. Second, we explore the channels through which the reform affects corporate dividend policy by considering the effect of corporate governance and stock liquidity. We find that the average cash dividend payout decreases in the post-reform period and that the reduction in cash payouts is more pronounced among firms with higher growth rates and higher liquidity. Given the fundamental difference in controlling shareholders between state-controlled and privately controlled firms, the reduction in cash payouts appears to be more substantial in state-controlled firms. Our results are robust to different time horizons surrounding the reform. We also investigate whether the reform affects the decisions of firms to pay cash dividends. The results indicate that the propensity to pay cash dividends significantly decreases after the reform. Furthermore, the post-reform period features a decrease in the probability of initiating a cash dividend and a greater likelihood of firms omitting cash dividends. In addition, firms tend to pay a lower level of dividends in the post-reform period when they maintain dividend payments. In Chapter four, we investigate how a shock to financing capacity affects listed firms’ dividend decisions in China, with a focus on financially constrained firms. In particular, we examine the change in firms’ propensity to pay cash dividends and the change in the dividend payout ratio after a mandatory regulation on financing qualification was released in 2008. As the regulation mandatorily associates dividend payment with firms’ external financing qualification, it can be regarded as a negative shock to firms’ financing capacity. Measuring financial constraints using a synthetic Whited and Wu (2006) index, we observe that the regulation alters the relationship between financial constraints and dividend policy. Before the regulation, constrained firms are less likely to pay cash dividends than unconstrained firms; when these firms do pay dividends, they tend to pay lower dividends. However, this pattern reverses after the regulation comes into effect. Financially constrained firms become more willing to pay cash dividends than are unconstrained firms, and they also pay higher dividends in relative terms. Furthermore, we find that the behavior of financially constrained firms differs from that of unconstrained firms when affected by the shock to financing capacity. Constrained firms display a larger post-regulation increase in the propensity to pay cash dividends and a smaller post-regulation reduction in cash dividend payout ratios. We argue that the increased use of dividends among constrained firms is driven by the desire to enhance public financing capacity. Our results confirm this conjecture by demonstrating that financing activities in the post-regulation period are concentrated in constrained firms that qualify for public financing.

2 citations

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Elias Rantapuska1•
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25 Jul 2005-Social Science Research Network
TL;DR: This article found that households invest only a small proportion of funds within two weeks, less than 1% of cash dividends and around 10% of tender offer proceeds, even when the investor and size of the cash flow are kept constant.
Abstract: This study documents how much investors reinvest dividends and tender offer proceeds. I find that households reinvest only a small proportion of funds within two weeks, less than 1% of cashdividends and around 10% of tender offer proceeds. Tender offer proceeds are more likely to be reinvested, even when the investor and size of the cash flow are kept constant. This finding is consistent with the idea that investors have separate mental accounts for dividends and capital assets.

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Journal Article•DOI•
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Stewart C. Myers1, Nicholas S. Majluf2•
Massachusetts Institute of Technology1, Pontifical Catholic University of Chile2
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TL;DR: In this paper, a firm that must issue common stock to raise cash to undertake a valuable investment opportunity is considered, and an equilibrium model of the issue-invest decision is developed under these assumptions.

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Journal Article•DOI•
Dividend Policy, Growth, and the Valuation of Shares

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Merton H. Miller, Franco Modigliani
01 Jan 1961-The Journal of Business
TL;DR: In this paper, the effect of differences in dividend policy on the current price of shares in an ideal economy characterized by perfect capital markets, rational behavior, and perfect certainty is examined.
Abstract: In the hope that it may help to overcome these obstacles to effective empirical testing, this paper will attempt to fill the existing gap in the theoretical literature on valuation. We shall begin, in Section I , by examining the effects the effects of differences in dividend policy on the current price of shares in an ideal economy characterized by perfect capital markets, rational behavior, and perfect certainty. Still within this convenient analytical framework we shall go on in Section II and III to consider certain closely related issues that appear to have been responsible for considerable misunderstanding of the role of dividend policy. In particular, Section II will focus on the longstanding debate about what investors "really" capitalize when they buy shares; and Section III on the much mooted relations between price, the rate of growth of profits, and the rate of dividends per share. Once these fundamentals have been established, we shall proceed in Section IV to drop the assumption of certainty and to see the extent to which the earlier conclusions about dividend policy must be modified. Finally, in Section V , we shall briefly examine the implications for the dividend policy problem of certain kinds of market imperfections.

6,265 citations

Journal Article•DOI•
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John R. Graham1, Campbell R. Harvey1, Campbell R. Harvey2•
Duke University1, National Bureau of Economic Research2
01 May 2001-Journal of Financial Economics
TL;DR: The authors survey 392 CFOs about the cost of capital, capital budgeting, and capital structure and find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes.

4,138 citations

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Frequently Asked Questions (2)
Q1. What contributions have the authors mentioned in the paper "Why individual investors want dividends" ?

In this paper, the question of why individual investors want to pay dividends was investigated by submitting a questionnaire to a Dutch investor panel, and the results indicated that individual investors do not tend to consume a large part of their dividends. 

The authors do not find much support for the “ irrational ” explanations of the existence of dividends, i. e. the uncertainty resolution theory of Gordon ( 1961, 1962 ) and the behavioral explanation of Shefrin and Statman ( 1984 ).