Describes the tendency of funds or investments to be followed by groups of investors who have similar preferences for a firm which follows a particular financing policy, such as the amount of leverage it uses.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
A theory stating that a company's stock price increases or decreases according to changes in the company's policies. For example, if a company raises its dividend, investors are more likely to buy that company's stock, which would increase the price. Likewise, if a company has an excessive amount of debt, investors are unlikely to want to buy the stock and the price will decrease. The clientele effect stands in contrast with the capital structure irrelevance principle. See also: Material News.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
The tendency of different securities to attract different types of investors, depending on the dividend policy of the issuer. For example, certain investors are attracted to stocks (for example, electric utility stocks) with high dividend yields while other investors, in high income-tax brackets, prefer stocks with lower dividend yields but more capital gains potential.
Case Study Following the close of security markets on September 25, 2001, Winn-Dixie Stores, Inc., announced the firm would slash its $1.02 annual dividend. The Jacksonville, Florida, supermarket chain was one of few large corporations that paid monthly dividends, a costly policy that attracted a clientele of investors who valued the regular current income. The monthly dividend of 8.5¢ per share was to be reduced to an expected 5¢ per quarter. The firm's policy had been to declare three monthly dividend payments at the beginning of each quarter. Under the new plan, only the quarterly dividend would be declared. At the time of the dividend announcement the firm also indicated first-quarter earnings would be in the range of 15¢ to 18¢ per share, a reduction from the previous projection of 24¢ to 30¢ per share. At the same time the company lowered its forecast for fiscal 2002 earnings. The announcement was bad news for stockholders, who saw the value of their shares fall in price during trading on the day following the news. Winn-Dixie common stock fell $7.37 to $12.41, a 37% decline on very heavy volume. The firm's chief financial officer said the new dividend policy would give Winn-Dixie more financial flexibility at the same time it placed added emphasis on capital appreciation rather than cash payments to stockholders. The large price decline indicated existing stockholders apparently didn't appreciate the new emphasis.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.