The Effect of Dividends on Consumption

Malcolm Baker, Stefan Nagel and Jeffrey Wurgler

Brookings Papers on Economic Activity, 2007, vol. 38, issue 1, 231-292

Abstract: In classical models the division of stock returns into dividends and capital gains has no "real" consequence for investor consumption. This paper, using two micro data sets that provide cross-sectional variation in dividend receipts and capital gains, empirically measures the effect of dividends on investor consumption. Analysis of data from the Consumer Expenditure Survey indicates that household consumption is particularly sensitive to realized dividend income, when one controls for total portfolio returns including dividends. Analysis of data from a discount brokerage shows that dividends are withdrawn from household portfolios at a much higher rate than capital gains, further suggesting that the form of returns matters for consumption and that investors pursue a mental accounting strategy to "consume income, not principal." Finally, the paper discusses what these estimates imply for the response of aggregate consumption to the May 2003 dividend tax cuts in the United States.

Keywords: dividends; consumption; macroeconomics; capital gains (search for similar items in EconPapers)
JEL-codes: D91 E21 E62 G35 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (54)

Downloads: (external link)
https://www.brookings.edu/wp-content/uploads/2007/03/2007a_bpea_baker.pdf (application/pdf)

Related works:
Working Paper: The Effect of Dividends on Consumption (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bin:bpeajo:v:38:y:2007:i:2007-1:p:231-292

Access Statistics for this article

More articles in Brookings Papers on Economic Activity from Economic Studies Program, The Brookings Institution Contact information at EDIRC.
Bibliographic data for series maintained by Haowen Chen ().