Retail Clientele and Dividend Policy

Abstract

Firms change their dividend policy following changes in their retail trading clientele. Using stock splits as an instrument, we find that a stock split leads to a 5.5 percentage point increase in the proportion of retail trading volume, which subsequently leads to a 0.10 percentage point decrease in the dividend yield and a 1.9 percentage point increase in annualized return volatility. The increase in retail trading clientele following a stock split is partially explained by the arrival new retail investors with a preference for low-priced shares. Financial market activity has impact on the real decisions of the firm.

Keywords: dividend policy, retail clientele, trader behavior, stock splits

JEL Classification: G1, G14, G30