Clientele Effect

A theory that assumes different policies of different companies attract a different type of investor( a “clientele”), and that changes in the company’s policy will cause these clientele to adjust their holdings accordingly. For example a company that pays out high dividends may have attracted a “clientele” that invests in high dividend paying stocks. A cut in the dividend payout ratio may cause these investors to sell some of their holdings.

Regardless of whether this theory is true or not, it appears companies are quite careful when declaring changes in policy. Some financial firms like Citigroup(as of 2008) were unwilling to eliminate their dividend even though their main business was losing money and they were issuing new shares to raise capital.

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