The Effect of Fiduciary Standards and Institutions' Preference for Dividend-Paying Stocks

Abstract

Many researchers perceive that the "Prudent Man" standard for fiduciary responsibility causes institutional investors to prefer dividend-paying stocks. However, most states revised their fiduciary standards during the 1990s, replacing Prudent Man constraints with the less-stringent Prudent Investor rules for many institutional investors. We find that the introduction of the Prudent Investor standard is followed by an economically and statistically significant reduction in institutional holdings of dividend-paying stocks. If institutional investors should no longer be assumed to have an exogenous preference for dividend-paying stocks, some conclusions about security returns and corporate behavior from the 1990s may need to be re-considered.

Keywords: institutional investors, dividends, Prudent Man