The Effect of Dividends on Consumption

Posted: 30 Apr 2007 Last revised: 12 Jan 2009

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Stefan Nagel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research; CESifo (Center for Economic Studies and Ifo Institute)

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

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Abstract

Classical models predict that the division of stock returns into dividends and capital appreciation does not affect investor consumption patterns, while naive "spend income, not principal" mental accounting rules and other economic frictions can cause investors to 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. Further analysis suggests that while several factors may be at work, mental accounting is perhaps the most credible single explanation for the results. Finally, our results imply some estimates of the effects of the 2003 dividend tax cut on aggregate consumption.

Keywords: dividend, consumption, tax cut, CEX, mental accounting

JEL Classification: D12, D91, H31, G35, H24

Suggested Citation

Baker, Malcolm P. and Nagel, Stefan and Wurgler, Jeffrey A., The Effect of Dividends on Consumption. Brookings Papers on Economic Activity, pp. 277-291, 2007, Available at SSRN: https://ssrn.com/abstract=983433

Malcolm P. Baker

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6566 (Phone)

HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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Stefan Nagel

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research ( email )

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CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Jeffrey A. Wurgler (Contact Author)

NYU Stern School of Business ( email )

Stern School of Business
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212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

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United States

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