Strategic Use of Dividend Payments by Mutual Funds

46 Pages Posted: 13 Jul 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: July 11, 2016

Abstract

Using a unique sample of open-ended mutual funds, which are flexible in dividend policy and not required to “pass through” dividend to investors, we test whether funds pay dividend to cater to investor’s demand for cash or they exploit investor’s imperfect rationality to serve fund managers’ own interests. We find that dividend yield (DY) is positively (negatively) related to a fund’s post-dividend net cash flow (performance). In addition, small funds and funds suffering from low net cash flows have stronger incentives to distribute high dividends. More importantly, high-DY funds attract disproportionally more individual investors. These results suggest that fund managers take advantage of the individual investors’ irrational dividend chasing behavior, thereby using dividends strategically to benefit managers at the expense of fund investors.

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

JEL Classification: G14

Suggested Citation

Xiao, Jun and Li, Mingsheng and Chen, Yugang, Strategic Use of Dividend Payments by Mutual Funds (July 11, 2016). Available at SSRN: https://ssrn.com/abstract=2808209 or http://dx.doi.org/10.2139/ssrn.2808209

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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