Empirical Evidence on the Existence of Dividend Clienteles

44 Pages Posted: 20 Jul 2007

See all articles by Edith S. Hotchkiss

Edith S. Hotchkiss

Boston College - Carroll School of Management

Stephen Lawrence

The Vanguard Group, Inc.

Date Written: July 2007

Abstract

This paper provides new evidence on the existence of dividend clienteles for institutional investors. We directly examine individual institutions' preferences for dividend paying stocks based on the characteristics of stocks held in their portfolio. Many institutions follow persistent investment styles, maintaining relatively high or low dividend yield portfolios over time. Institutions which hold portfolios of higher yielding stocks are significantly more likely to increase their holdings in response to a dividend increase or sell their stock in response to a decrease. For a subset of institutions, we directly observe the proportion of their portfolio managed on behalf of taxable clients. Consistent with tax-induced dividend clienteles, institutions with more taxable clients are less likely to increase their holdings in response to a dividend increase. Finally, we show that stock price reactions to announcements of dividend increases are related to characteristics of the institutions holding the stock. Our results suggest that tax status as well as other factors are important in explaining observed clientele behavior.

Keywords: Dividend policy, institutional investors, clienteles

JEL Classification: G32, G35

Suggested Citation

Hotchkiss, Edith S. and Lawrence, Stephen, Empirical Evidence on the Existence of Dividend Clienteles (July 2007). Available at SSRN: https://ssrn.com/abstract=1001429 or http://dx.doi.org/10.2139/ssrn.1001429

Edith S. Hotchkiss (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Stephen Lawrence

The Vanguard Group, Inc. ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

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