7.4 Empirical Evidence Analysis of individual investor accounts provides support for anecdotal evidence.

The data involve the accounts of almost 78,000 investors trading at a large discount brokerage firm between 1 1 and 1 !. "epending on their personal circumstances, some individual investors find cash dividend especially attractive. #nvestors over the age of !$ concentrate their stock holdings in firms that pay high dividends, especially if the investors are retired. These investors hold over 80% of their stock portfolio in dividend paying stocks. #n contrast, investors under the age of &$ hold !$% of their portfolios in dividend paying stocks. 'lder investors e(hibit a strong preference for dividend regardless of their income. They not only hold dividend paying stock, but assign considerably greater weight to stock featuring high dividend yields. )otably, among young investor, those with lower incomes also assign a greater portion of their portfolio to high dividend yield stocks. #ndividual investors who prefer dividends might do so for at least three reasons, *1+ to finance consumption in later years, *,+ to mitigate the risk e(posure and *-+ because of ta( effects. .vidence suggests that there are clienteles of investors, with each clientele motivated by at least one of their reasons. #n addition, there is evidence to suggest that individual investors reinvest less than 10 percent of their dividend income within two weeks of receiving that income. This finding supports the notion that investors tend to use dividend to finance consumption. 7.4.1 Contrast with Institutional Investors #ndividual investors have large average ownership in non/dividend/paying stocks than in dividend/paying stocks. 0owever reverse is true for

institutional investor, whose ownership in dividend/paying stocks is about twice as large as in non/dividend/paying stocks. Among institutional investors, pension funds and banks find dividends attractive mainly because of stricter 1prudent/man2 rules, rather than because of a si3eable payout. .vidence suggests that institutional investors favor repurchases over dividend payouts. 4hen a firm increases its dividend payout, institutions tend to decrease their holdings

7.5

How Managers Think

!out "ividends

5onsider the factors that drive managers6 decisions about dividends. 7.5.1 Changing #a$out #olicies% &ome Histor$ 5ompanies pay out cash to shareholders in three distinct way, one is cash dividend, share repurchases and last one is li7uidating dividends to shareholders of target firm that has been ac7uired. "uring 1 and :&00 billion in li7uidating dividends. "ividend increases occur much more fre7uently than dividend decreases. "uring 1 there were 1,70- dividend increases or initiations. #n contrast, there were only 1-$ decreases or omissions during that period. The market reacts positively to announcements of repurchases and dividend increases, but more negatively to announcements of dividend decreases and this is called symmetric effect. 7.5.' &urve$ Evidence ;anagers have developed heuristics to set dividend policies that cater to investors6 psychological needs. <ohn =intner>s classic 1 $! survey found that managers establish long/run target payout ratios, yet smooth dividends in , 8.9. corporations paid out more than :-$0 billion in dividends and repurchases

the short/run. =intner reports that managers are particularly concerned about having to rescind a dividend increase. 7.5.7 "ividend as a Conve$or o( In(ormation 'ver 80% state that there are negative conse7uences to reducing dividends. 'ver 7$% believe that dividends convey information about their firm. 'ver !0% would rather raise funds to finance new investment pro?ects than cut dividends. About a third believe that paying dividends, instead of plowing back earnings, makes a firm6s stock less risky 7.'Catering to Investors) Tastes (or "ividends <ust fewer than $0% indicate that they set their policy in order to attract institutional investors to hold their stock. About -0% cite 1attracting institutional investors because they monitor management decisions.2 @ewer than 1$% cite Apaying out dividends to reduce cash, thereby disciplining our firm.A @ewer than 10% indicate that they pay dividends to show they can afford to bear costs of e(ternal funding or pass up profitable investments. <ust over &0% mention that they set policy in order to attract individual *retail+ investors. @ewer than -0% mention the ta( penalty associated with dividends. ;anagers appear to cater to investors> preference for dividends. .(pect stocks of dividend paying firms to have lower book/to/market e7uity than those of non/dividend paying firms.