The Article: ˜Institutional and Individual Investor (Article Critique Sample)

Name
Professor
Institution
Course
Date
In the article ‘Institutional and individual investor preferences for dividends and share repurchases’ Ravi Jain studies the assumptions that were overlooked by prior studies of the traditional societies which showed that high dividend paying firms attracted many institutional investors compared to individual investors (Jain, 2007).
The traditional researcher assumed that institutional investors were attracted to high dividend yields without considering other factors such as empirical examination. In details Jain directly examines this assumption. Jain postulates that there are non-tax incentives that make many institutions invest in dividend-paying stocks. For instance, common law, such as the Employee Retirement Security Act of 1974, requires that the institutional managers to be wise and careful when investing. The act made some institutions to stop investing in firms that omitted dividends and started to purchase stocks from firms that provided dividends. Additionally, some institution investors have charters that prohibit them from purchasing stock that does not offer dividends. Institutional investors, such as non-profit organizations could prefer dividends if they are required to spend only income rather than principal. Therefore, Jain also examines whether tax and non-tax factors could make institutions and/individuals to have higher/lower stock holdings in firms that pay dividends (Jain, 2007).
Jain in the article also tests the contradictory hypothesis based on the individual or institutional investor preference towards share repurchase. The data available for the years 1989-1996 makes Jain suggest that institutional investors tend to prefer stocks that yield low dividends as compared with those which yield high dividend stocks. However, individuals, as well as non-institutional investors, prefer stocks that yield high dividends in comparison with stocks that yield low dividends. Baker (2006), states that institutional investors tend to invest in firms that allow share repurchases, unlike the individual investors who seemed not to like firms that engaged in share purchases.
Unlike previous studies, Jain checks on the differences of both lower taxed institutions and higher taxed individual investors based on their preferences for dividends as well as share repurchase. This has made it possible to test the unproven claims suggesting that, firms that had paid high dividends had greater institutional investors being attracted to it while individual investors who were highly taxed were not marginal investors in stocks that paid high dividends.The study also adds to the existing work by making many original contributions. For instance, in addition to investigating how aggregate institutional ownership related with dividend yield by the use of sample firms, Jain also did the same analysis but using only dividend-paying firms. Using this approach it became possible to test if institutions preferred low-dividend firms to high –dividend firms. By so doing Jain was able to do away with the effects of non-tax incentives that lured institutional investors in dividend-paying firms.
The study also largely contributes to the prior work by not only analyzing the preferences of high dividend yield by institutions but also analyzes the institutional preference for dividend firms to non-paying firms. This makes it possible to check the effects of the tax and also the non-tax incentives where both show that institutional investors should have a greater tendency towards buying stock in firms that pay dividends.
More so, Jain also contributes to the existing work by doing the first empirical examination of the preferences for share repurchases by both the individual as well as institutional investors.In other sections of this article, Jain describes the data used in this study, and also presents the results of the main empirical tests that checks on individual and institutional investors’ preferences for share purchases as well as high dividend paying firms. In the proceeding section, Jain provides additional results on empirical examination as well as examining the robustness of findings.
To explain the individual and institutional ownership of a firm, data theoretically or empirically shown was acquired from CRSP and Compustat. However, Evanoff, Kaufman and Malliaris (2012) suggest that the CRSP that was used may not give the actual amount of stock repurchases. They also add that an alternative measure that use Compustat data to examine the amount and the preference of stock by a given firm, sometimes tends to overstate the actual share repurchases. If Compustat measure is used, it would lead to a reduction of the sample size. This is due to the fact that this measure is not used to examine banks and utilities considering the two are the main sectors which the firms have a greater tendency to pay dividends.
In carrying out an empirical examination, Jain bases on institutional and individual holdings to examine the dividends yielded by average groups of firms. A sample of only dividend-paying firms is used and the approach helps to focus on effects of tax as well as reducing effects of non-tax factors. Non-tax factors may include Charter prohibitions as well as various reasons that would make institutional investors acquire stock in firms that pay dividends.
Jain then groups all the firms that pay dividend into three almost equal classes as either l...