Reaching-for-Income Behavior in the Japanese Mutual Fund Market

We exploit Japanese mutual fund flows to demonstrate a strong investor demand for dividends in low-interest-rate environments. According to recent studies, investors who seek current income are more likely to invest in dividend-paying assets in such circumstances. These investors often shift their investments from bank deposits to dividend-paying assets, which offer more attractive cash flows despite higher risk. Investors’ such behavior, commonly referred to as "reaching-for-income," has been examined in various studies. Beyond the previous finding that dividend yields drive this "reaching-for-income" behavior, we show that the frequency of dividend payouts also plays an important role in this behavior. Even after controlling for dividend yields and other crucial factors that impact mutual fund flows, funds that pay dividends on a monthly basis receive more significant inflows than funds that pay out dividends less frequently, particularly during periods of economic expansion. Our findings suggest that, in the presence of income- chasing investors, the amounts and frequency of dividends have implications for asset prices.