Market Participation and Dividend Clienteles

Models of dividend preferences (clienteles) can lead to biased results if they ignore the connection between market participation and asset allocation decisions. Using data from the Consumer Expenditure Survey (CEX), I jointly model and estimate these investment decisions with a two-step procedure due to Heckman (1977). The estimated coefficients support the idea that market frictions and behavioral biases combine to affect US households’ asset allocation and market participation. Households with more diversified income are less likely to join the market and, when they do, are less likely to rely on dividends. Age positively affects dividend preference only for older consumers, while it has almost no effect on market participation. Income positively affects market participation and dividend preferences. Education encourages market participation. Consumers without a college degree account for most of the documented anomalous investment behavior. ∗Department of Finance, Smeal College of Business, Penn State University. Email: [email protected]. I thank Laura Field, Tim Simin, Olesya Grishchenko, Jean Helwege and Lukas Roth for their helpful comments and suggestions. All errors are my own.