The Dividend Disconnect

55 Pages Posted: 29 Nov 2016 Last revised: 26 Mar 2018

Samuel M. Hartzmark

University of Chicago - Booth School of Business

David H. Solomon

Boston College - Carroll School of Management

Date Written: March 22, 2018

Abstract

Many individual investors, mutual funds and institutions trade as if dividends and capital gains are disconnected attributes, not fully appreciating that dividends result in price decreases. Behavioral trading patterns (e.g. the disposition effect) are driven by price changes instead of total returns. Investors rarely reinvest dividends, and trade as if they are a separate, stable income stream. Analysts fail to account for the effect of dividends on price, leading to optimistic price forecasts for dividend-paying stocks. Demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to lower returns for dividend-paying stocks.

Keywords: Behavioral Finance, Dividends, Mental Accounting, Asset Pricing

JEL Classification: G02, G11, G12, D14

Suggested Citation

Hartzmark, Samuel M. and Solomon, David H., The Dividend Disconnect (March 22, 2018). 7th Miami Behavioral Finance Conference 2016. Available at SSRN: https://ssrn.com/abstract=2876373 or http://dx.doi.org/10.2139/ssrn.2876373

Samuel M. Hartzmark (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

David H. Solomon

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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