Caring for Investors or Preying by Managers? Strategic Use of Dividend Payments by Mutual Funds

52 Pages Posted: 18 Sep 2015 Last revised: 28 Jan 2016

See all articles by Jun Xiao

Jun Xiao

Jiangxi University of Finance and Economics

Mingsheng Li

Bowling Green State University - College of Business Administration

Yugang Chen

Sun Yat-sen University

Date Written: September 14, 2015

Abstract

Dividend payments attenuate agency issues, but they can also be used by managers for management entrenchment. Using open-ended mutual funds, we find that dividend yield (DY) is positively (negatively) related to a fund’s post-dividend net cash flow (performance). In addition, we find that managers of small funds and funds suffering from low net cash flows (NCFs) have stronger incentives to distribute high dividends to increase their NCFs. More importantly, high-DY funds attract disproportionally more individual investors. These results suggest that fund managers take advantage of the individual investors’ irrational behavior of dividend chasing, thereby using dividends strategically to benefit managers at the expense of fund investors.

Keywords: Dividend chasing; Conflict of interest; Agency problems; Flow-performance; Irrational behavior; Individual and Institutional investors; Chinese mutual funds

JEL Classification: G30

Suggested Citation

Xiao, Jun and Li, Mingsheng and Chen, Yugang, Caring for Investors or Preying by Managers? Strategic Use of Dividend Payments by Mutual Funds (September 14, 2015). Available at SSRN: https://ssrn.com/abstract=2660345 or http://dx.doi.org/10.2139/ssrn.2660345

Jun Xiao

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Mingsheng Li (Contact Author)

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Yugang Chen

Sun Yat-sen University ( email )

135, Xingang Xi Road
Guangzhou, Guangdong 510275
China

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