Why individual investors want dividends

The question of why individual investors want dividends is investigated by submitting a questionnaire to a Dutch investor panel. The respondents indicate that they want dividends partly because the cost of cashing in dividends is lower than the cost of selling shares. Their answers provide strong confirmation for the signaling theories of Bhattacharya (1979) [Bhattacharya, S., 1979. Imperfect information, dividend policy and the "bird in the hand" fallacy. Bell Journal of Economics 10, 259-270] and Miller and Rock (1985) [Miller, M., Modigliani, F., 1961. Dividend policy, growth and the valuation of shares. Journal of Business 34, 411-433]. They are inconsistent with the uncertainty resolution theory of Gordon (1961, 1962) [Gordon, M., 1961, The Investment, Financing, and Valuation of the Corporation, Richard D. Irwin, Homewood, IL Gordon, M., 1962. The savings, investment and valuation of a corporation. Review of Economics and Statistics 44, 37-51.]and the agency theories of Jensen (1986) [Jensen, M.C., 1986. Agency costs of free cash flow, corporate finance and takeovers. American Economic Review 76, 323-329] and Easterbrook (1984) [Easterbrook, F.H., 1984. Two agency-cost explanations of dividends. American Economic Review 74, 650-659]. The behavioral finance theory of Shefrin and Statman (1984) [Shefrin, H.M., Statman, M., 1984. Explaining investor preference for cash dividends. Journal of Financial Economics 13, 253-282] is not confirmed for cash dividends but is confirmed for stock dividends. Finally, Our results indicate that individual investors do not tend to consume a large part of their dividends. This raises some doubt as to whether a reduction or elimination of dividend taxes will stimulate the economy. (c) 2005 Elsevier B.V. All rights reserved.