52 Pages Posted: 17 Sep 2020 Last revised: 25 Feb 2022
Date Written: February 24, 2022
Corporate dividends cluster on increments of 5, like 25, 50, and 75. Firms that pay dividends on these `prominent' amounts have lower operating performance and five-factor alphas 77 b.p. per year lower compared to firms whose dividends are not increments of 5. Consistent with agency frictions that reduce managerial effort and lead to lazy decisions, we find that clustering effects are stronger for entrenched firms, with more market power, and low levels of shareholder activism. Dividend increases also tend to cluster more than cuts, consistent with saliency bias. In a counterfactual exercise, we find no similar patterns in clustering or performance in a sample of ADRs. Our results complement a number of recent studies showing the economic importance of simple decision heuristics.
Keywords: Dividends, Rounding, Clustering, Agency
JEL Classification: G30, G35, G02
Suggested Citation: Suggested Citation