Spillover Effects of Payouts on Asset Prices and Real Investment

Abstract

This paper uses the reinvestment of corporate payouts by financial institutions as a nonfundamental shock to prices of other stocks held in the same portfolio. Exploiting the separation between announcement and payment dates, we find dividends, in particular, generate payment date price pressure, but no announcement date news spillovers. We estimate an asset demand elasticity of 1.25 and document a releveraging market feedback effect on investment, where firms respond to price increases by issuing debt and use the funds to invest. Through this mechanism, $10 paid in dividends by the average firm translates into $2 of investment at other firms.

Keywords: Institutional Investors, Price Pressure, Market Feedback Effects, Corporate Payouts

JEL Classification: G11, G12, G23