Why Do Companies Pay Dividends?
AbstractThis paper presents a simple model of market equilibrium to explain why firms that maximize the value of their shares pay dividends even though the funds could instead be retained and subsequently distributed to shareholders in a way that would allow them to be taxed more favorably as capital gains. The two principal ingredients of our explanation are: (1) the conflicting preferences of shareholders in different tax brackets and (2) the shareholders' desire for portfolio diversification, we show that companies will pay a positive fraction of earnings in dividends. We also provide some comparative static analysis of dividend behavior with respect to tax parameters and to the conditions determining the riskiness of the securities.
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Bibliographic InfoPaper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3204679.
Date of creation: 1983
Date of revision:
Publication status: Published in American Economic Review
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- David F. Bradford, 1979.
"The Incidence and Allocation Effects of a Tax on Corporate Distributions,"
NBER Working Papers
0349, National Bureau of Economic Research, Inc.
- Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
- Feldstein, Martin & Sheshinski, Eytan & Green, Jerry, 1979.
"Corporate Financial Policy and Taxation in a Growing Economy,"
3203643, Harvard University Department of Economics.
- Feldstein, Martin S & Green, Jerry & Sheshinski, Eytan, 1979. "Corporate Financial Policy and Taxation in a Growing Economy," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 411-32, August.
- Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
- Feldstein, Martin S, 1970. "Corporate Taxation and Dividend Behaviour," Review of Economic Studies, Wiley Blackwell, vol. 37(1), pages 57-72, January.
- Feldstein, Martin S & Slemrod, Joel, 1980.
"Personal Taxation, Portfolio Choice, and the Effect of the Corporation Income Tax,"
Journal of Political Economy,
University of Chicago Press, vol. 88(5), pages 854-66, October.
- Martin Feldstein & Joel Slemrod, 1980. "Personal Taxation, Portfolio Choice and The Effect of the Corporation Income Tax," NBER Working Papers 0241, National Bureau of Economic Research, Inc.
- Alan J. Auerbach, 1980.
"Wealth Maximization and the Cost of Capital,"
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0254, National Bureau of Economic Research, Inc.
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