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A Theory of Dividends Based on Tax Clienteles

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Author Info
Franklin Allen () (University of Pennsylvania, The Wharton School, Finance Department)
Antonio Bernardo () (Finance Area)
Ivo Welch () (International Center for Finance)

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Abstract

This paper offers a novel explanation for why some firms prefer to pay dividends rather than repurchase shares. It is well-known that institutional investors are relatively less taxed than individual investors, and that this induces "dividend clientele" effects. We argue that these clientele effects are the very reason for the presence of dividends, because institutions have a relative advantage in monitoring firms or in detecting firm quality. Firms paying dividends attract relatively more institutions and perform better. The theory is consistent with some documented regularities, such as a reluctance of firms to cut dividends, and offers novel empirical implications, such as a prediction that is the tax difference between institutions and retail investors that determines dividend payments, not the absolute tax payments.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm92.

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Date of creation: 25 Jun 1998
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Handle: RePEc:ysm:somwrk:ysm92

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G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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  1. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December. [Downloadable!] (restricted)
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  2. 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. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
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  6. 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. [Downloadable!] (restricted)
  7. Ofer, Aharon R & Thakor, Anjan V, 1987. " A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchases and Dividends," Journal of Finance, American Finance Association, vol. 42(2), pages 365-94, June. [Downloadable!] (restricted)
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  8. 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, Oxford University Press for Society for Financial Studies, vol. 6(1), pages 121-54. [Downloadable!] (restricted)
  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. [Downloadable!]
  10. Brennan, Michael J & Thakor, Anjan V, 1990. " Shareholder Preferences and Dividend Policy," Journal of Finance, American Finance Association, vol. 45(4), pages 993-1018, September. [Downloadable!] (restricted)
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  11. Chowdhry, Bhagwan & Nanda, Vikram, 1994. "Repurchase Premia as a Reason for Dividends: A Dynamic Model of Corporate Payout Policies," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(2), pages 321-50. [Downloadable!] (restricted)
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