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Institutional Tax Clienteles and Payout Policy

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  • Mihir A. Desai
  • Li Jin
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    Abstract

    This paper employs heterogeneity in institutional shareholder tax characteristics to identify the relationship between firm payout policy and tax incentives. Analysis of a panel of firms matched with the tax characteristics of the clients of their institutional shareholders indicates that "dividend-averse" institutions are significantly less likely to hold shares in firms with larger dividend payouts. This relationship between the tax preferences of institutional shareholders and firm payout policy could reflect dividend-averse institutions gravitating to low dividend paying firms or managers adapting their payout policies to the interests of their institutional shareholders. Evidence is provided that both effects are operative. Instrumental variables analysis indicates that plausibly exogenous changes in payout policy result in shifting institutional ownership patterns. Similarly, exogenous changes in the tax code indicate that as the tax cost of paying dividends changes, managers alter their dividend policy to serve their institutional shareholders.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13283.

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    Date of creation: Jul 2007
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    Publication status: published as Desai, Mihir, and Li Jin. "Institutional Tax Clienteles and Payout Policy." Journal of Financial Economics 100, no. 1 (April 2011): 68–84.
    Handle: RePEc:nbr:nberwo:13283

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    1. Eugene F. Fama & Kenneth R. French, . "Testing Tradeoff and Pecking Order Predictions about Dividends and Debt.”," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 506, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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    16. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
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    Cited by:
    1. Mori, Naoya, 2010. "Tax clientele effects of dividends under intertemporal consumption choices," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(5), pages 1089-1097, May.

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