Catering to Behavioral Demand for Dividends and Its Potential Agency Issue

Posted: 7 Dec 2017

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: August 2, 2015

Abstract

Using a unique sample of open-ended mutual funds, which are not subject to “pass through” requirements, we test whether paying dividend creates a potential agency issue. 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 inflows have stronger incentives to distribute high dividends after controlling for dividend paying capacity. More importantly, the prevalent behavioral demand for dividend is mainly due to individual investors’ dividend chasing. Thus, catering to a behavioral demand for dividends creates a potential agency issue rather than mitigating one.

Keywords: Dividend pass-through; Agency problems; Flow-performance; Behavioral demand; Individual investors; Chinese mutual funds

JEL Classification: J14

Suggested Citation

Xiao, Jun and Li, Mingsheng and Chen, Yugang, Catering to Behavioral Demand for Dividends and Its Potential Agency Issue (August 2, 2015). Pacific-Basin Finance Journal, Vol. 46, 269-291. Available at SSRN: https://ssrn.com/abstract=3081505

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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