Clientele Effect Theory

Advance via Richardson Petit in 1977.It stated such different types of groups of shareholders or clientele have different type of preferences for dividend depending upon their level of income from another sources. Low income earners prefer high dividends to meet their daily consumption whereas high income earners prefer low dividends to ignore payment of more tax. Consequently, when a firm sets a dividend policy, hence there will be shifting of investors into and out of the firm until equilibrium is realized. Low, income shareholders will shift to firms paying high income and high dividends shareholders to firms paying low dividends.

At equilibrium, dividend policy will be consistent along with clientele of shareholders a firm has. Dividend decision at equilibrium is irrelevant as they cannot cause any shifting of investors.