“Dividend Clientele and Return Comovement” by Allaudeen Hameed
National University of Singapore
Hong Kong Polytechnic University
We find that stock return comovement is induced by dividend clienteles. Specifically, stocks that initiate dividend experience increases (decreases) in return comovement with other dividend (non-dividend) paying stocks. The return comovement effects are not due to changes in firm fundamentals. Dividend-prone (dividend averse) mutual funds increase (decrease) their holdings of dividend initiators and the flow induced trading by these funds is an important source of comovement. We explore the spike in dividend initiations following the 2003 Jobs and Growth Tax Relief Reconciliation Act, and find confirmatory evidence supporting dividend clientele based return comovement. We also find that dividend clientele effects on return comovement is higher when investor sentiment towards dividends is higher.