7 Preference Cash Dividends Flashcards
Why does it not make sense for ppl the prefer cash div?
They are taxed more than capital gains (suppose their substitutes)
Techniques Self-control dividends
Principal agent framework (internal)
- Exercise will power = increase “self denial” for doer through changing doers incentives -> very costly
- Manipulation of doers’ opportunities = imposing additional constraints upon doers opportunities. Limit amount damage done. Reduce temptation and the amount of self-denial to be exercised
Prospect theory dividends
Risk seeking for losses. Losses loom larger than gains
- Integration= people keep sums of money seperate in mind even when the amounts relate tot he same thing. You combine the gain of div with loss of capital. To make loss less or have an overall gain.
- Segregation = (+) Xmas present = super added benefit .
(-) silver lining= gains cant cover losses. So prefer gain+loss over just loss
Regret aversion
preference div as a rule. Also riskaverse for gains. Div =gain
Error of commission (s-t) (more pain) error of omission
Pride (value function with responsibility) increases value of gain. Regret increases of losses and by a bigger amount than gains
Regret effect > pride effect
Clientelle effect
Depends per person and on their life cycle
- low div yield if u dont want to spend a lot (younger)
- when u get older u will increase the proportion of portfolio devoted to dividends
Relationship age. Income and dividend
The older u are (age) the more u rely on div because u will receive less or no income (human capital)
Adv declaration of div
- You dont have to break your “do not consume capital” rule.
- Reference point is different for stock already in portfolio and stock purchased as div. selling stock div wont be perceived as a loss.
- Be a silver lining. Which can be segregated out of his portfolio
Premium paid for div?
Price paid for
- self control strategy
- desire to segregate
- avoid regret
