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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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    References listed on IDEAS

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    1. 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.
    2. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    3. 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(2), pages 233-253, June.
    4. 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.
    5. 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 1421-1460, December.
    6. 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 365-394, June.
    7. 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.
    8. 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.
    9. 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.
    10. 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 321-350.
    11. John, Kose & Williams, Joseph, 1985. "Dividends, Dilution, and Taxes: A Signalling Equilibrium," Journal of Finance, American Finance Association, vol. 40(4), pages 1053-1070, September.
    12. 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 121-154.
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    JEL classification:

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

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