Dividends, Trust, and Firm Value

Abstract

We find evidence that investors value dividends differently depending on their level of trust. Our
tests indicate that investor demand for dividend-paying stocks increases as trust decreases, and
that this relationship affects market values. We begin with survey evidence showing that people
think accounting fraud is less likely among dividend payers, and that people with low trust are
more likely to hold dividend-paying stocks. We then empirically exploit accounting fraud
discoveries within a mutual fund’s portfolio as a shock to trust. We show that the mutual funds,
in response to these shocks, tilt their portfolios toward dividend-paying stocks. This result does
not appear to be explained by a shift in risk preferences, indicating that the mutual funds are
seeking dividends in particular. Finally, we provide evidence that dividend payers experience a
premium in their market values, relative to non-payers, when their investor base becomes less
trusting.