Do Senior Citizens Prefer Dividends? Local Clienteles vs. Firm Characteristics

Abstract

We examine the payout policy of U.S. firms over the period 1980-2008. Prior research indicates that firm characteristics, managerial preferences, and investor clienteles are all important factors in setting payout policy. We examine the roles of these factors and seek to determine which drives the payout decision. Counter to the oft-reported positive relation between senior citizens and the use of dividends, our initial time-series analysis finds that the proportion of senior citizens is negatively related to firm propensity to pay dividends and is positively related to the use of repurchases. This negative relation between senior proportion and the use of dividends is explained by the evolution of firm characteristics, including the average firm size, age, and volatility of earnings over time. Changes in firm factors coincide with changes in the proportion of seniors. Our results indicate that senior citizens are either indifferent between dividends and repurchases or demand dividends and have no influence over firm policy. Further, manager preference for flexibility drives the payout decision.

Keywords: Payout Policy, Clientele Effect

JEL Classification: G35