Stocks that start paying dividends tend to co-move more with other dividend paying stocks and co-move less with stocks that are non-dividend payers. These changes in return co-movement do not come from variations in firm fundamentals or characteristics. Instead, we find strong evidence that the return comovement generated by dividend decisions is related to ownership and institutional trading. Mutual funds that have an explicit preference for dividends hold more of the dividend initiators and flows to these funds move the prices of dividends payers in tandem. Our findings support a clientele-based explanation for return comovement.
Keywords: Dividend Clientele; Return Comovement; Style Investing
JEL classifications: G12, G35, H20
