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The Effect of Fiduciary Standards on Institutions' Preference for Dividend‐Paying Stocks
Author(s) -
Hankins Kristine Watson,
Flannery Mark J.,
Nimalendran M.
Publication year - 2008
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2008.00029.x
Subject(s) - fiduciary , dividend , business , institutional investor , context (archaeology) , portfolio , economics , financial economics , corporate governance , dividend policy , payment , investment decisions , investment (military) , asset (computer security) , monetary economics , finance , behavioral economics , law , paleontology , duty , computer security , politics , political science , computer science , biology
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.