Question

Explain the dividend Clientele effect and how it affects the dividend policy of a firm. (short essay)

Answer 1

The dividend Clientelle effect states that the different types of investors have different preferences for dividend policy. The investors in the high tax bracket, prefer less dividends as the dividends are taxable, so the investors do not prefer recieving dividends. The investors in the low tax bracket, prefer high dividends as they prefer a stable and current income as the dividends are taxed at a lower rate. So, a firms current clientelle affects its dividend policy. If the investors are composed of retirees who prefer a stable income and are in the low tac bracket, a firm would prefer paying out regular dividends.