The Clientele Effect and Dividend Theory

An example: Consider Mr. Jim who's a stockholder in Company X, a microchip manufacturer. At the end of every quarter he receives his dividend check like clockwork. One quarter though his check is not received; it's been replaced with a brief message from the firm's Board of Directors stating that dividends will be suspended for an indefinite period of time. Mr. Jim wonders what's up. He calls his broker, Clyde, who doesn't have much information about the situation (typical of many brokers who are only interested in sales).

The Dividend Clientele Hypothesis: Evidence from the …

Yes. For example, we’re paying less for shoes, few of which are made in the U.S. anymore.
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A direct examination of the dividend clientele hypothesis

Munger: Some of this is due to consumer credit, which has been pushed to extremes. Other countries that have done this have suffered bad consequences – South Korea, for example, really suffered for two or three years. I don’t think this is a time to swing for the fences.

The Dividend Clientele Hypothesis: Evidence from ..

In 1998, there were incredible opportunities. Just like today, there were a lot of smart people with 150 IQs running around with lots of money, but there was a panic. For example, there was a 30 basis point difference in the yields of on-the-run and off-the-run 30-year Treasuries. Literally, a 29 1/2- year traded 30 basis points higher than a 30-year because of the slight liquidity difference. You could have made a lot going long one and short the other. You wouldn’t have thought this kind of thing was possible, but it happened.

[CM: Steel-toed work shoes, for example, do not employ a lot of technological change.]
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Confessions of a Public Defender - American Renaissance

WB: I try to figure out if I owned the entire business what I’d pay them. This is not rocket science. The seventy businesses we have each have different economics – we don’t set a standard Berkshire compensation plan. A BNSF needs lots of capital, others could be run by a chimpanzee, while others with Alfred P Sloan as CEO couldn’t run them well. I try to figure out the best strategy – and we find that managers stay with us. It is not rocket science. But I spend time on it, and it takes ability to differentiate. An HR dept would be a disaster, and they would have people telling them all sorts of different equations. It requires common sense and interaction with managers. We agree on a measure of what they are adding to company.

The Dividend Clientele Hypothesis: ..

2. This means that firms generally prefer not to change dividends, particularly downwards. One explanation for this is the "clientele hypothesis." That is, firms tend to have a certain class of shareholders who depend upon the firm’s dividend policy to obtain funds for consumption on a regular basis. When the firm lowers its dividends frequently or unexpectedly, these shareholders have to sell some of their shares and incur transactions costs in order to obtain funds for consumption purposes. If the firm increases dividends, they have to incur transactions costs when they reinvest these funds. (However, see the answer to the next question as well.)

Dividend clientele, new insights, and new questions: …

A great example [of how this can work] is Wal-Mart when Sam Walton died. The Walton family has done a magnificent job of hiring successors to run the place and maintain the culture. The Waltons are there to step in if needed, but they don’t run the business.

which is inconsistent with the clientele hypothesis.

I think an example is the best thing you can leave behind. Obviously, you want to leave the right example. I mean, Wilt Chamberlain's tombstone may say, "At last, I sleep alone," and that's probably not the example you want to leave. If what I've done with Berkshire Hathaway - running a unique and independent company in true pursuit of shareholder value - persists and people learn from it to improve the way they invest and run their companies, that would be a fine legacy to leave.