Clientele Effect and equity values

[LudoZ]

The CFA curriculum says “even if a clientele effect exists it would not follow that dividend policy affects equity values […] the change would only result in a switch in clientele”. I don’t agree with this, and am curious if someone could convince me otherwise.
First of all, I’d like to start out by pointing out that this effect would run counter to the two fund theorem. If all investors held a combination of the risk free asset and the market portfolio, then there could be no clientele effect since all investors would be holding some proportion of all firms.
Suppose now that the two clienteles are young professionals, more intrested in low dividend stocks, and old people, interested in high dividend stocks. Suppose that these two groups are identical in everything (wealth, etc.) except that there are a lot more old people than young people. If then a company switches from appealing from the young clientele to the old clientele, then it would face higher demand, and its share value should rise.
Could someone please give me a counterargument? Thanks.

 

[CMLSML]

Clientele effect simply makes the brokers rich - if an investor prefers type I stocks, they would switch into type I stocks (and out of say type II stocks). As long as there is no disequilibrium in supply/demand, no impact on prices. But if everybody wants type I, then type I will go up!

 

[LudoZ]

If everyone is switching to type I stocks then the price of type I stocks will go up in the process. So you agree with me that the curriculum is wrong?

 

[onlysimon]

MBT is only theoretical. there is still massive demand from pension funds for dividend stocks to produce cash to distribute.
http://www.shareaction.org/sites/default/files/uploaded_files/press/BPdi...
when microsoft introduced dividends (2003) price didnt change, this implies that growth investors sold, and pension funds bought.
I suggest you stop worrying about if the curriculum is wrong. the view which will be held by the majority on june 6th.

 

[oktavian]

LudoZ wrote:If all investors held a combination of the risk free asset and the market portfolio, then there could be no clientele effect since all investors would be holding some proportion of all firms.

They don’t.

Quote:Suppose now that the two clienteles are young professionals, more intrested in low dividend stocks, and old people, interested in high dividend stocks. Suppose that these two groups are identical in everything (wealth, etc.) except that there are a lot more old people than young people. If then a company switches from appealing from the young clientele to the old clientele, then it would face higher demand, and its share value should rise.

Yes this makes some sense to me…. except…. if the the clientele effect is true, and if we assume there are a ton of dividend-seekers and a ton of dividend-avoiders, then there are enough investors to fairly price any security. An excess of investors of the right clientele doesn’t imply an excess of demand since pretty soon, the high stock price would reduce demand.
What I mean is, more eyes on the stock doesn’t necessarily increase it’s price (although… getting into behavioural finance, probably it does)

 

[oktavian]

LudoZ wrote:If all investors held a combination of the risk free asset and the market portfolio, then there could be no clientele effect since all investors would be holding some proportion of all firms.

They don’t.

Quote:Suppose now that the two clienteles are young professionals, more intrested in low dividend stocks, and old people, interested in high dividend stocks. Suppose that these two groups are identical in everything (wealth, etc.) except that there are a lot more old people than young people. If then a company switches from appealing from the young clientele to the old clientele, then it would face higher demand, and its share value should rise.

Yes this makes some sense to me…. except…. if the the clientele effect is true, and if we assume there are a ton of dividend-seekers and a ton of dividend-avoiders, then there are enough investors in both categories to fairly price any security. An excess of investors of the right clientele doesn’t imply an excess of demand since pretty soon, the high stock price would reduce demand.
What I mean is, more eyes on the stock doesn’t necessarily increase it’s price (although… getting into behavioural finance, probably it does)

 

[oktavian]

aiiii, double post….

 

[LudoZ]

onlysimon wrote:
I suggest you stop worrying about if the curriculum is wrong. the view which will be held by the majority on june 6th.

I worry more that I generally believe that the curriculum is right, and if I think that its wrong I probably have not understood something. I remember better things I understand, and it helps me clarify the material overall, so I think it is worthwhile to try to understand the material instead of trying to rote learn everything.

 

[LudoZ]

Quote:What I mean is, more eyes on the stock doesn’t necessarily increase it’s price (although… getting into behavioural finance, probably it does)

I think you’re right. Given that investors’ preferences do not enter in any way the fair value of the security, the change clientele composition cannot affect prices. Thanks!