What Is the Clientele Effect?

The customer effect theory is a further extension of the tax difference theory, and studies the differences in the attitude of investors at different tax levels towards dividend distribution.

Customer effect theory

Customer effect theory holds that investors are more than just

Investors' differences in marginal tax rates lead to differences in their attitudes towards dividend policies. Investors with high marginal tax rates will choose stocks with low dividend payout rates, and investors with low marginal tax rates will choose stocks with high dividend payout rates. This kind of investor's preference for stocks that implement the corresponding dividend policy based on their own marginal tax rate is called "customer effect". Therefore, the theory of customer effect believes that when formulating or adjusting dividend policies, companies should not ignore the needs of shareholders for dividend policies; companies should formulate dividend policies for investors according to the different needs of investors: for low-income classes and risks I hate investors. Because of their low tax burden and preference for cash dividends, they want the company to pay more cash dividends. Therefore, companies should implement a dividend policy with a high cash dividend division ratio. For high-income classes and risk-preferred investors, due to their tax burden High, and prefer capital growth, they hope that the company will pay less cash dividends, and hope to avoid taxation through capital gains. Therefore, companies should implement a low cash dividend ratio, or even a dividend-free dividend policy.