Local Dividend Clienteles

by R. Christopher Small, for The Harvard Law School Forum at Harvard Law School, Febraury 12, 2010.

In our paper Local Dividend Clienteles, which is forthcoming in the Journal of Finance, we examine the role of investor demand in shaping corporate payout policy. Miller and Modigliani (1961) raise the question of whether firms set policies and investors sort accordingly, or companies respond to the preferences of their current shareholders. In this paper, we provide evidence consistent with the latter.

Specifically, we test for the effect of dividend demand on payout policy. The tendency of older investors to hold dividend-paying stocks in combination with individual investors’ inclination to hold local stocks results in stronger dividend demand for companies located in areas with many seniors. Demographics thus provide an empirical proxy for dividend demand, which we exploit in this paper to examine the broader question of whether the preferences of current owners influence corporate actions.

As predicted, we find a significant positive effect of Local Seniors, the fraction of seniors in the county in which a firm is located, on the firm’s propensity to pay dividends, its propensity to initiate dividends, and on its dividend yield. The effect of Local Seniors on the corporate decision to start paying dividends is particularly strong and of the same economic magnitude as other key determinants such as company size and age…(continue reading)

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