The Effect of Fiduciary Standards on Institutions' Preference for Dividend-Paying Stocks


  • For helpful comments on prior drafts of this paper, we thank Max Schanzenbach, Robert Sitkoff, Mike Ryngaert, Chuck Trzcinka, and two anonymous referees. The usual disclaimer applies.This paper was written while Nimalendran was on leave to the Securities and Exchange Commission (SEC). As a matter of policy, the SEC disclaims any responsibility for any private publication or statement of any SEC employee or commissioner. This article expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.


Many researchers apparently believe that some institutional investors prefer dividend-paying stocks because they are subject to the “prudent man” (PM) standard of fiduciary responsibility, under which dividend payments provide prima facie evidence that an investment is prudent. Although this was once accurate for many institutions, during the 1990s most states replaced the PM standard with the less-stringent “prudent investor” (PI) rule, which evaluates the appropriateness of each investment in a portfolio context. Controlling for the general decline in dividend-paying stocks, we find that institutions reduced their holdings of dividend-paying stocks by 2% to 3% as the PI standard spread during the 1990s. Studies of asset pricing and corporate governance should no longer consider dividend payments when evaluating the actions of institutional investors.