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A Theory of Dividends Based on Tax Clienteles

Author

Listed:
  • Franklin Allen
  • Antonio E. Bernardo
  • Ivo Welch

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.

Suggested Citation

  • Franklin Allen & Antonio E. Bernardo & Ivo Welch, 2000. "A Theory of Dividends Based on Tax Clienteles," Journal of Finance, American Finance Association, vol. 55(6), pages 2499-2536, December.
    • Handle: RePEc:bla:jfinan:v:55:y:2000:i:6:p:2499-2536
    DOI: 10.1111/0022-1082.00298
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    JEL classification:

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

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