A Theory of Dividends Based on Tax Clienteles

This paper explains why some firms prefer to pay dividends rather than repurchase shares. When institutional investors are relatively less taxed than individual investors, dividends induce "ownership clientele" effects. Firms paying dividends attract relatively more institutions, which hav...

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Bibliographic Details
Published in:The Journal of finance (New York) 2000-12, Vol.55 (6), p.2499-2536
Main Authors: Allen, Franklin, Bernardo, Antonio E., Welch, Ivo
Format: Article
Language:English
Subjects:
Business structures
Corporate taxes
Dividends
Financial management
Income taxes
Institutional investments
Investment policy
Investors
Repurchasing
Risk aversion
Shareholders
Stock dividends
Taxation theories
Theory
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Summary:This paper explains why some firms prefer to pay dividends rather than repurchase shares. When institutional investors are relatively less taxed than individual investors, dividends induce "ownership clientele" effects. Firms paying dividends attract relatively more institutions, which have a relative advantage in detecting high firm quality and in ensuring firms are well managed. The theory is consistent with some documented regularities, specifically both the presence and stickiness of dividends, and offers novel empirical implications, e.g., a prediction that it is the tax difference between institutions and retail investors that determines dividend payments, not the absolute tax payments.
ISSN:0022-1082
1540-6261
DOI:10.1111/0022-1082.00298