The Effect of Dividends on Consumption

The Effect of Dividends on Consumption

Yet there are a number of reasons to think that dividend policy, and dividends more generally, may indeed affect consumption. Most obviously, the popular advice to “consume income, not principal” suggests a potentially widespread mental accounting practice in which investors do not view dividends and capital gains as fungible, as in the homemade dividends story and traditional theories of consumption, but rather place them into different mental accounts from which they have different propensities to consume. This behavior is also consistent with a belief that dividends, unlike capital gains, represent permanent income. Less exotic but equally realistic frictions, such as transaction costs (of making homemade dividends) and taxes, can also lead an investor to favor consuming dividends before capital appreciation.

Malcolm Baker, Stefan Nagel, and Jeffrey Wurgler

Brookings Institution

Winter 2007

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By |2018-01-01T00:00:00-08:00January 1st, 2018|Efficiency/Growth, Financial Regulation, Inequality, Reference|