Policies regarding dividends and repurchases, relate to framing. In the traditional MM approach, people are assumed to be impervious to framing effects. In the behavioral approach, mental accounting and hedonic editing feature framing effects that lead individual investors to find dividends especially attractive. Older, retired investors find dividends attractive because they view dividends as a replacement for wage and salary income. Young, employed investors find dividends attractive because regular dividends make it easier for them to tolerate risk.

Managers have developed heuristics to set dividend policies in order to meet investors’ psychological needs. Those heuristics involve smoothing. Managers who set dividend policies with investors’ needs in mind are said to cater to investors.

Share repurchases are not psychologically equivalent to dividends. In this respect, managers also think about share repurchases differently than they think about dividends. Share repurchases need not be regular, whereas dividend payouts entail much more of a commitment to regularity.

Prices are impacted by changes in dividend policy and share repurchases. Many of these impacts give rise to price inefficiencies, notably drift effects. Markets underreact to both dividend omissions and dividend initiations, and the strength of the price impact is twice as large in the case of omissions. Markets also underreact to share repurchases.