Framing and Disposition Effects in Stockholders' Dividend Preferences

Abstract

This paper investigates factors affecting stockholder dividend preferences. The optional dividends paid by Hong Kong firms provide a unique natural experiment for testing dividend preference in a tax free setting. When offered the opportunity to convert cash dividends to stock, investors exhibit a reverse disposition effect. Instead of realizing gains following positive returns they prefer converting to stock, and investors realize gains by keeping the cash when returns have been negative. In contrast when stockholders face an option to convert stock dividends for cash they consider the yield offered, but not stock risk and return. These results show how dividend preference is framed both by returns and by the type of choice offered.

Keywords: Kong, natural experiment, dividends, framing, disposition effect, mental accounts

JEL Classification: G35