Rational and Behavioral Motives to Trade: Evidence from Reinvestment of Dividends and Tender Offer Proceeds

38 Pages Posted: 14 Oct 2008 Last revised: 25 Sep 2009

Markku Kaustia

Aalto University School of Business

Elias Henrikki Rantapuska

Aalto University

Date Written: October 12, 2008

Abstract

We provide evidence of households’ stock market trading in response to clearly identifiable positive cash flow shocks: dividend payments and tender offer proceeds. Transaction cost motives appear important, and there is some support for rational portfolio rebalancing and life cycle considerations as well. Households’ tendency to reinvest is low, even for large and unexpected dividend payments. This is consistent with a default choice bias, and is not due to dividend clientele effects. Reinvestment of tender offer proceeds is significantly higher, controlling for other important factors. This is consistent with mental accounting, i.e., cash flows from different sources are treated differently.

Keywords: Dividend, reinvestment, investor behavior

Suggested Citation

Kaustia, Markku and Rantapuska, Elias Henrikki, Rational and Behavioral Motives to Trade: Evidence from Reinvestment of Dividends and Tender Offer Proceeds (October 12, 2008). AFFI/EUROFIDAI, Paris December 2008 Finance International Meeting AFFI - EUROFIDAI. Available at SSRN: https://ssrn.com/abstract=1283184 or http://dx.doi.org/10.2139/ssrn.1283184

Markku Kaustia (Contact Author)

Aalto University School of Business ( email )

P.O. Box 1210
Helsinki, 00100
Finland
+3589 4313 8475 (Phone)
+3589 4313 8678 (Fax)

Elias Henrikki Rantapuska

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

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