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The Effect of Fiduciary Standards on Institutions' Preference for Dividend‐Paying Stocks

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  • Kristine Watson Hankins
  • Mark J. Flannery
  • M. Nimalendran

Abstract

Many researchers apparently believe that some institutional investors prefer dividend‐paying stocks because they are subject to the “prudent man” (PM) standard of fiduciary responsibility, under which dividend payments provide prima facie evidence that an investment is prudent. Although this was once accurate for many institutions, during the 1990s most states replaced the PM standard with the less‐stringent “prudent investor” (PI) rule, which evaluates the appropriateness of each investment in a portfolio context. Controlling for the general decline in dividend‐paying stocks, we find that institutions reduced their holdings of dividend‐paying stocks by 2% to 3% as the PI standard spread during the 1990s. Studies of asset pricing and corporate governance should no longer consider dividend payments when evaluating the actions of institutional investors.

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  • Kristine Watson Hankins & Mark J. Flannery & M. Nimalendran, 2008. "The Effect of Fiduciary Standards on Institutions' Preference for Dividend‐Paying Stocks," Financial Management, Financial Management Association International, vol. 37(4), pages 647-671, December.
    • Handle: RePEc:bla:finmgt:v:37:y:2008:i:4:p:647-671
    DOI: 10.1111/j.1755-053X.2008.00029.x
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    2. Minton, Bernadette A. & Schrand, Catherine, 2016. "Institutional investments in pure play stocks and implications for hedging decisions," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 132-151.
    3. Rihanat Idowu Abdulkadir & Nur Adiana Hiau Abdullah & Wong Woei-Chyuan, 2015. "Dividend Policy Changes in The Pre-, Mid-, and Post-Financial Crisis: Evidence from The Nigerian Stock Market," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 11(2), pages 103-126.
    4. Chen, Jie & Song, Wei & Goergen, Marc, 2019. "Passing the dividend baton: The impact of dividend policy on new CEOs' initial compensation," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 458-481.
    5. Jing Chi & Jingjing Yang & Martin Young, 2014. "Mutual Funds’ Holdings and Listed Firms’ Dividend Payouts: Evidence from China," Accounting and Finance Research, Sciedu Press, vol. 3(3), pages 1-84, August.
    6. Huang, Wei & Paul, Donna L., 2017. "Institutional holdings, investment opportunities and dividend policy," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 152-161.
    7. Rizzo, Emanuele, 2018. "Essays on corporate governance and the impact of regulation on financial markets," Other publications TiSEM b5158260-ea13-4763-b992-6, Tilburg University, School of Economics and Management.

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