The Article: ˜Institutional and Individual Investor (Article Critique Sample)
The task for this assignment was to review an article that explores the objectives of a specific study and to explain how the analyses undertaken helps to achieve the objectives. The sample provided explains how the analysis presented relates to the research aims of the article and further how the authors of the article claim to have made a contribution to the body of knowledge.source..
In the article â€˜Institutional and individual investor preferences for dividends and share repurchasesâ€™ 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 fir...
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