The Effect of Dividends on Consumption

Jeffrey Wurgler,

JW

Jeffrey Wurgler New York University

Malcolm Baker, and

MB

Malcolm Baker Harvard University

Stefan Nagel

SN

Stefan Nagel Stanford University

Discussants: James Poterba and

James Poterba President - National Bureau of Economic Research (NBER), Mitsui Professor of Economics - MIT

Joel B. Slemrod

JBS

Joel B. Slemrod

MICROSOFT’S $32 BILLION CASH dividend of December 2004 was the largest
corporate payout ever. Classical models of finance and consumption-saving
decisions predict that this dividend will have little effect on the consumption
of Microsoft investors. Under the assumptions of Merton Miller and Franco
Modigliani, for example, investors can always reinvest unwanted dividends,
or sell shares to create homemade dividends, and thereby insulate their
preferred consumption stream from corporate dividend policies.1 Thus, in
traditional models, the division of stock returns into dividends and capital
gains is a financial decision of the firm that has no “real” consequence for
investor consumption patterns.