The pricing of dividends in equity valuation john r. University of santa clara, leavey school of business. And what, if anything, can we do to prevent the next one. They argue that dividends improve the utility of investors with prospect theory value. A valuable resource for both academics and practitioners, this authoritative collection brings together the main works in both psychology and finance, dealing with the debate between proponents of the behavioral school and advocates of the efficient market school. These disruptive effects include the disposition effect shefrin and statman, 1985. Statman is the author of the just published book what investors really want mcgraw hill and and writes at his blog what investors want.
The role of corporate reputation in determining investor. Shefrin and others published the disposition to sell winners. The question of why individual investors want dividends is investigated by submitting a questionnaire to a dutch investor panel. Winston smith, employed as a records no, not vinyl editor at the ministry of truth, drags himself home to victory mansions nothing victorious about them for lunch. The story unfolds on a cold april day in 1984 in oceania, the totalitarian superpower in post world war ii europe. Explaining investor preference for cash dividends andrei simonov. The effect of dividends on consumption nyu stern school.
Behavioral capital asset pricing theory journal of. The effects of manipulating anticipated utility on decision. Miller 1986 wrote in response shefrin and statmans 1984 article on. In december 1984, the late fischer black, then presidentelect of the. Its effect on established investor relationships, namely investor satisfaction and loyalty, are novel research areas. First, we place this behavior pattern into a wider theoretical framework concerning a general disposition to sell winners too early and hold losers too long. It relates to the tendency of investors to sell assets that have increased in value, while keeping assets that have dropped in value hersh shefrin and meir statman identified and named the effect in their 1985 paper, which found that people dislike losing significantly more than they enjoy winning. The effects of manipulating anticipated utility on. Focusing on france is appealing for several reasons. Noise traders are traders who commit cognitive errors while.
The disposition to sell winners too early and ride losers. Explaining investor preference for cash dividends sciencedirect. This cited by count includes citations to the following articles in scholar. The respondents indicate that they want dividends partly because the cost of cashing in dividends is lower than the cost of selling shares. Shefrin 2009, 2010 describes some of the biases that affected managers of companies. Nonetheless, the gordons theory is built on uncertainty in the direction ofupcoming dividends, though the theory of shefrin and statman 1984 is built on investors who select to use incomes from dividends rather than capital gains. In other words, the dividend process represents the remaining disposition of organizational reserves after the lucrative investment opportunities are capitalized. This study uses ohlsons 1995 an d 2001 accountingbased equity valuation model to structure tests of four explanations for the anomalously posi. The optimal portfolios of bpt investors resemble combinations of bonds and lottery tickets, consistent with friedman and savages 1948 observation. Baker and wurgler 2004a argue that the dividend premium reflects sentiment for risky non. Shefrin and statman 1984 were the first to introduce the behavioral arguments to explain the dividends decision. Meir statman, glenn klimek professor of finance, leavey school of business, santa clara university. Shefrin, journal of portfolio management, winter 1995. The impact of the catering theory and financial firms.
Tyebjee, journal of public policy and marketing, vol. A behavioral signaling model malcolm baker harvard business school and nber. Explaining investor preference for cash dividends with h. People design portfolios by the rules of behavioral portfolio theory and. Our first explanation of why investors prefer cash dividends deals. A catering theory of dividends new york university. This paper is concerned with two aspects of this feature. Pdf the disposition to sell winners too early and ride. This paper tests the catering theory of dividend in the french market. Shefrin and statman 1984 argue that mental accounting may influence investors dividend preferencesinvestors who keep dividend income and capital gains in two separate mental accounts may not. The disposition to sell winners too early and ride losers too long.
The present paper discusses findings of a study among german investors of a publicly traded company that put into perspective the. Behavioral portfolio theory volume 35 issue 2 hersh shefrin, meir statman. In beyond greed and fear, the most authoritative guide to what really influences the decisionmaking process, hersh shefrin uses the latest psychological research to help us understand the human behavior that guides stock selection, financial services, and corporate financial strategy. Meir statman glenn klimek professor of finance santa clara university. Meir statman is the glenn klimek professor of finance at santa clara university.
For one way of putting dividends into the utility function, see shefrin and statman 56. The effects of manipulating anticipated utility on decisionmaking maximilian wegener alexander eichner ioannis avramidis research paper postgraduate business economics general publish your bachelors or masters thesis, dissertation, term paper or essay. Section 3 explains the role which behavioral variables may play in determining corporate dividend policy. In the real world, transaction costs or taxes cannot be zero, which casts serious doubt on the relevancy of the dividend irrelevancy theory. In thalers words, along with 197778, it was a most productive year in his life. Behavioral portfolio theory, introduced by shefrin and statman 2000, is. Another article by markowitz 1952b is part of the foundation of behavioral. Shefrin and meir statman university of santa clara, santa clara, ca 95053, usa received may 1982, final version received november 1983 the wellknown tendency of investors to favor cash dividends emerges quite naturally in two new theories of choice behavior the theory. Theory and evidence hersh shefrin and meir statman journal of finance, 1985, vol.
According to shefrin, the financial community ignores the psychology of investing at its own peril. We develop a positive behavioral portfolio theory bpt and explore its implications for portfolio construction and security design. Apart from contribution to a khaneman and knetsch project on fairness famous dictators game thaler played an. Biography meir statman is the glenn klimek professor of finance at the leavey school of business, santa clara university. In order to examine relationships in a more rigorous manner, we present a formal model that is motivated by shefrin and statman 1984 as well as by shefrin and thaler 1988. Shefrin and meir statman university of santa clara, santa clara, ca 95053, usa received may 1982, final version received november 1983 the wellknown tendency of investors to favor cash dividends emerges quite naturally in two new theories of choice behavior the.
From the perspective of the individual publicly traded. We would like to acknowledge the helpful remarks made on earlier versions by peter bernstein, fischer black, ben branch, ivan. Section 3 introduces the key psychological concepts used in behavioral finance. Now an established field, behavioral finance studies investor decision processes which in turn shed light on anomalies, i. Hersh shefrin born in winnipeg, manitoba is a canadian economist best known for his pioneering work in behavioral finance. The disposition effect is an anomaly discovered in behavioral finance. Behavioral portfolio theory journal of financial and. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. The book explains how psychological phenomena impact the entire field of finance.
Evidence on dividend preferences of retail investors. This book represents the first general, comprehensive treatment of the subject. Shefrin and statman argue that investors prefer to mentally divide returns into capital gains and dividends and consider each separately. A catering theory of dividends 1127 wayinitiations and omissions are related to the dividend premium, but the aggregate dividend yield, the aggregate payout ratio, and the aggregate rate of dividend increases are not. We argue that behavioral finance offers some answers to these questions. Hersh shefrin was in the field of behaviorial finance from the beginning when he and economist richard thaler first applied behavioral ideas to economics while both were teaching at the university of rochester in the late 1970s. Hersh shefrin and meir statman, two leaders in the field of behavioral finance, attempted to explain the preference for the cash dividends anomaly in their 1984 paper, explaining investor. Behind each holding may be a story of family business, family quarrels, legacies. The behavioral foundations of corporate dividend policy050612. This framework includes other elements, namely mental accounting, regret aversion, selfcontrol, and tax considerations. Part iii chapter 1 winston finds himself in the cells in the ministry of love awaiting his sentence and punishment. Behavioral finance is the study of how psychology affects financial decision making and financial markets.
Behavioral portfolio theory by hersh shefrin, meir statman. Shefrin 1981, shefrin and statman 1984 propose that some investors pre. Firms that pay dividends tend do so at regular intervals and rarely reduce them. The ones marked may be different from the article in the profile. Shefrin and statman 1984 began the analysis of the divi dend puzzle with a consideration of frames.
Noise black 1986 the journal of finance wiley online. Beyond greed and fear hersh shefrin oxford university. Northholland explaining investor preference for cash dividends hersh m. The solution to the puzzle, i now believe, is that we must put dividends directly into the utility function. The disposition effect behavioral finance the disposition. How investors and markets behave to be published by oxford university press early next year. Behavioral capital asset pricing theory volume 29 issue 3 hersh shefrin, meir statman. Meir statman, glenn klimek professor of finance, leavey school of business, santa clara university beyond greed and fearchallenges your most fundamental assumptions about investing and. Market efficiency, minsky, and keynes hersh shefrin meir statman santa clara university november 2011.
A number of other papers have used empirical gambling data to. Stocks are usually more than just the abstract bundles of return of our economic models. They also motivate a demand for dividends with prospect theory and regret aversion. Shefrin and statman 1984 argued that investors wants, cognitive errors, and emotions affect their preferences for particular stocks. Later, shefrin and meir statman took the same ideas to the field of finance at santa clara university in the early 1980s. For another way of resolving the dividend puzzle, and of relating it to the capital structure puzzle, see myers 52.
Theory and evidence hersh shefrin and meir statman abstract one of the most significant and unique features in kahneman and tverskys approach to choice under uncertainty is aversion to loss realization. Does the catering theory of dividend apply to the french. Behavioral aspects of the design and marketing of financial products. We also find that the relation between initiations and omissions and the dividend premium is equally apparent after controlling. Hersh shefrin is the author of beyond greed and fear 3. Behavioral finance is about normal people and the markets that drive them crazy. Statman research leavey school of business santa clara. Free cash flow is the cash flow that remains after all positive net present value npv projects are undertaken. Taken together, mental accounting, regret and selfcontrol based theories predict that dividend income and capital gains need not be perfect substitutes and consumption from dividends may be preferred over consumption from capital gains. Journal of applied corporate finance 14 3, 1126, 2001. Hersh shefrin and meir statman 1985 disposition effect.
Pdf the disposition to sell winners too early and ride losers too. The disposition to sell winners too early and ride losers too long article pdf available in the journal of finance 40. Hersh and statman, meir, making sense of beta, size and book tomarket november 1994. See miller and modigliani 1961, thaler and shefrin 1981, shefrin and statman 1984, and shefrin and thaler 1988 for theoretical reasons on why dividend clienteles may exist. What is behavioral finance what investors really want. Apr 28, 2007 prior research suggests that corporate reputation is a determinant of initial investment decisions, possibly leading to detrimental stock choices. He has no idea as to how long he has been there, he only knows he has not eaten for a very long time. One that uses prospect theory even more heavily than we do is shefrin and statman 1984. Statman, explaining investor preference for cash dividends. S451 hooting arrows into the soft spots of standard finance was great funespecially in the 1980s, when behavioral finance had few spots, soft or hard, to serve as return targets. Staikouras 7 behavioral finance endeavors to bridge the gap between finance and psychology. Statman, explaining investor preference for cash dioidends the allocation of overhead costs is a useful tool in the control of managers actions. In addition, the subsequent discussion about dividend preference is part of a much.958 643 247 126 1130 623 902 136 316 390 968 1566 1140 1049 189 91 1226 1049 1117 417 1062 695 317 21 1231 648 1304 1321 1344 280 879 601