Tuesday, August 09, 2005

Do Investors Reinvest Dividends and Tender Offer Proceeds? by Elias Rantapuska

SSRN-Do Investors Reinvest Dividends and Tender Offer Proceeds? by Elias Rantapuska

Short answer: Not really.

Rantapuska asks two interesting questions:
  1. Are dividends and the proceeds from tender offers really reinvested?
  2. Are the proceeds from cash flows from tender offers treated differently than those from dividends.
Using data from Finland, the author finds that a relatively small percentage of the proceeds are immediately reinvested and that investors do appear to treat dividends differently from tender proceeds.

In Rantapuska's own words:
"analyses show that households reinvest probably less than 1% and under no circumstances more than 8.1% of the dividends within two weeks of the payment. Institutions other than mutual funds are not reinvesting either. There is also strong evidence on investors being more likely to reinvest proceeds from tender offers than dividends. This result holds even when I control for the identity of the investor, size of the cash flow, and the extraordinary nature of tender offer proceeds payment. This result can be understood in terms of mental accounting: investors label corporate cash-disbursements to mental accounts of capital assets and dividend income and are more prone to reinvest the former."
Pretty interesting. And yet more evidence that DRIP programs (both for mutual funds and individual stocks) are probably a good idea.

The mental accounting idea is also intriguing. Purely economic investors would treat cash as cash regardless of its source.

Rantapuska, Elias Henrikki, "Do Investors Reinvest Dividends and Tender Offer Proceeds?" (July 25, 2005). EFA 2005 Moscow Meetings, Forthcoming http://ssrn.com/abstract=675981

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