A definition of clientele might be formulated as “the clients or customers, as of a professional person or shop, considered collectively; a group or body of clients.” In the sphere of economics, it is a term directly connected to the clientele effect.
Explanation:
Different groups of investors-clients of the market prefer different dividend payment policies. Some shareholders prefer current income and wish the company to allocate a large share of profit to a dividend payment.
Others are focused on the future and prefer reinvesting because they do not need to spend the accumulated income and reinvest it. Thus, companies have to adapt to the preferences of their present and potential shareholders to exist in today’s conditions of severe competitiveness – this phenomenon is called the clientele effect.
The system of income taxes has an important role within the scope of the clientele effect. Shareholders can redistribute their investments between enterprises, and enterprises can, to some extent, change their dividend policy.
However, redistribution may be ineffective due to the presence of brokerage costs because of the high probability that shareholders who sell shares will have to pay tax on realized capital gains. Therefore, managers take into account the effect of the clientele and are reluctant to change their dividend policy, since these changes may encourage shareholders to sell their shares, which will lead to a decrease in their price.
The clientele effect makes a company to implement such a dividend policy that meets the expectations and mentality of most shareholders. If the main composition of shareholders (the clientele of the company) prefers current income, then the dividend policy should proceed from the predominant direction of profit for current consumption.
And vice versa, if the main composition of shareholders prefers to increase their future earnings, then the dividend policy should proceed from the predominant capitalization of profit in the process of its distribution.