Reaching for Dividends
43 Pages Posted: 24 Oct 2015 Last revised: 9 Aug 2019
Date Written: July 30, 2019
Interest rates dived into uncharted territories for an extended period after the financial crisis. What is the impact on investor behavior and asset prices? We find that when interest rates fall, flows into income-oriented equity funds increase, with higher dividend-yielding funds attracting more inflows after controlling for fund returns. Responding to their incentives, income fund managers tend to aggressively over-weight high dividend stocks in a low-rate environment. This behavior of “reaching for dividends” generates market impact: high dividend stocks tend to have higher prices when interest rates fall, and lower excess returns when interest rates subsequently normalize.
Keywords: Low Interest Rates, Monetary Policy, Dividends, Income Funds, Flows
JEL Classification: E40; E50; G10; G20
Suggested Citation: Suggested Citation