Working Paper: NBER ID: w12288
Authors: Malcolm Baker; Stefan Nagel; Jeffrey Wurgler
Abstract: Classical models predict that the division of stock returns into dividends and capital appreciation does not affect investor consumption patterns, while mental accounting and other economic frictions predict that investors have a higher propensity to consume from stock returns in the form of dividends. Using two micro data sets, we show that investors are indeed far more likely to consume from dividends than capital gains. In the Consumer Expenditure Survey, household consumption increases with dividend income, controlling for total wealth, total portfolio returns, and other sources of income. In a sample of household investment accounts data from a brokerage, net withdrawals from the accounts increase one-for-one with ordinary dividends of moderate size, controlling for total portfolio returns, and also increase with mutual fund and special dividends. We comment on several potential explanations for the results.
Keywords: dividends; consumption; behavioral finance; mental accounting
JEL Codes: E21; G35; D12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dividend income (G35) | household consumption (D10) |
| ordinary dividends (G35) | net withdrawals from investment accounts (D14) |
| dividends (G35) | consumption behavior (D10) |
| ordinary dividends (G35) | higher propensity to consume (D12) |
| special dividends (G35) | lower propensity to consume (E21) |