Clustering in dividends: Do managers rely on cognitive reference points?

Prior studies (see e.g. [Rosch, E. (1975). Cognitive reference points. Cognitive Psychology, 7, 532–547]) indicate that multiples of ten serve as cognitive reference points with a view to perceiving and evaluating numbers. In order to explore whether managers set dividends per share (henceforth DPS) at or just above a cognitive reference point, we perform a digital analysis on US firms’ DPS for the period 1995–2004. That is, based on the theory of cognitive reference points, DPS of $2.00 will be viewed as being abnormally larger than DPS of $1.99, whereas the actual difference only amounts to a marginal $0.01. Results presented in this paper indicate that managers fall back on cognitive reference points when they set DPS, which shows in significantly more (fewer) zeroes (large digits) in the second-from-the-left position of DPS than would normally be expected. Overall, results presented in this paper tally with prior findings on odd-ending prices and price clustering documented in related disciplines.