64 Pages Posted: 27 Jul 2022
Date Written: July 15, 2022
Contrary to the current state of research, we find almost complete reinvestment of dividends among the brokerage clients of a German online bank. Yet, investors do not reinvest most dividends immediately after payment. Initially, the bulk of dividends remains parked as cash in investors’ brokerage accounts. In the months following payment, this brokerage cash is then reinvested. We explain such behavior with default effects: Because both reinvestment and withdrawal from brokerage accounts require action, investors initially default to leaving dividends parked as brokerage cash. As time goes by and investors trade, they reduce their brokerage cash and reinvest dividends as an add-on to their usual trading activity. We test this explanation using a subset of dividends that are not paid to brokerage cash accounts, but directly to investors’ checking accounts. In line with default effects favoring such dividends to be consumed, we find no reinvestment among this subset of dividends.
Keywords: dividend reinvestment, default effects, brokerage cash accounts, mental accounting, household finance, retail investors
JEL Classification: D14, G11, G40, G41, G50, G51
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