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A Theory of Dividends Based on Tax Clienteles

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  • Franklin Allen

    (Wharton School at the University of Pennsylvania,)

  • Antonio E. Bernardo

    (Anderson School at UCLA,)

  • Ivo Welch

    (School of Management at Yale University)

Abstract

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. Copyright The American Finance Association 2000.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 55 (2000)
Issue (Month): 6 (December)
Pages: 2499-2536

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Handle: RePEc:bla:jfinan:v:55:y:2000:i:6:p:2499-2536

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  1. John, Kose & Williams, Joseph, 1985. " Dividends, Dilution, and Taxes: A Signalling Equilibrium," Journal of Finance, American Finance Association, vol. 40(4), pages 1053-70, September.
  2. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc.
  3. Admati, Anat R & Pfleiderer, Paul & Zechner, Josef, 1994. "Large Shareholder Activism, Risk Sharing, and Financial Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1097-1130, December.
  4. Barclay, Michael J. & Smith, Clifford Jr., 1988. "Corporate payout policy : Cash Dividends versus Open-Market Repurchases," Journal of Financial Economics, Elsevier, vol. 22(1), pages 61-82, October.
  5. Titman, Sheridan & Trueman, Brett, 1986. "Information quality and the valuation of new issues," Journal of Accounting and Economics, Elsevier, vol. 8(2), pages 159-172, June.
  6. Ian Ayres & Peter Cramton, 1994. "Relational Investing and Agency Theory," Papers of Peter Cramton 94clr, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  7. Ahron R. Ofer & Anjan V. Thakor, 2004. "A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchase and Dividends," Finance 0411031, EconWPA.
  8. Michael J. Brennan & Anjan V. Thakor, 2004. "Shareholder Preferences and Dividend Policy," Finance 0411017, EconWPA.
  9. Lucas, Deborah J. & McDonald, Robert L., 1998. "Shareholder Heterogeneity, Adverse Selection, and Payout Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(02), pages 233-253, June.
  10. Hausch, Donald B & Seward, James K, 1993. "Signaling with Dividends and Share Repurchases: A Choice between Deterministic and Stochastic Cash Disbursements," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 121-54.
  11. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-88, June.
  12. Chowdhry, Bhagwan & Nanda, Vikram, 1994. "Repurchase Premia as a Reason for Dividends: A Dynamic Model of Corporate Payout Policies," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 321-50.
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