The clientele effect is a theory that focuses on the movement of stock prices as they relate to specific options. This particular concept holds that the upward and downward movement of those prices occurs due to the reactions of investors to specific events that have an impact on the goals and demands of those investors. Some of the events that may cause changes in the way investors perceive a given stock option include the implementation of a tax, changes in the way dividends are paid, or any other type of policy change that affects the operation of the business issuing the securities.
A basic assumption of the clientele effect is that any type of event considered negative by investors will lead them to begin withdrawing their support from the option and the issuing company. Upon withdrawing that support, the investors will set about the task of finding some other way to invest their money. This often leads to investors choosing to direct their interest toward a similar company that does not appear encumbered by the same negative event. As a result, demand for the options decrease and the market price begins to drop.
At the same time, a clientele effect can be positive. For example, if a business makes a change in the dividend policy such as shifting the dividend payout ratio in a manner that investors perceive as positive, the degree of support is likely to increase. In this scenario, investors are more likely to acquire additional shares of the stock and also recommend the option to other investors. The end result of this type of clientele effect is that the issuing company generates additional share capital, strengthens its position within the marketplace, and ultimately makes more money for everyone concerned.
It is important to note that presentation of any changes in policy has a lot to do with how investors perceive those changes. This has led to situations where a company that wanted to decrease a dividend would have to convince investors why this move is in their best interests in the long run. If the company is able to minimize the impact of the policy change and actually motivate investors to see the shift in a positive light, most will likely choose to retain their shares and possibly purchase additional options. Should the business be unable to spin the change in a manner that investors see as a step forward, then the clientele effect is likely to be a significant number of shares dumped into the marketplace, which triggers the decrease in price.
