Taxes, stock ownership, and payout policy: Evidence from a 2011 tax reform in Japan

The 2011 tax reform in Japan changed the definition of the large individual shareholders in the Japanese tax law. As a result of this tax reform, the top marginal tax rate on dividend income for individual investors whose ownership ratios were between 3 and 5% rose from 10 to 43.6%. This tax reform created an incentive for these investors to restrict their ownership stakes to below 3%. We find clear evidence of such ownership adjustments: 51.9% of 3-to-5%-stake investors sold their stocks before the tax hike. The percentage of sellers was 86.1% for those whose ownership ratios were between 3 and 3.1%. We exploit this tax reform to examine whether investors f tax preferences affected firms f payout policy. Individual investors who retained stakes of at or more than 3% after the tax reform had an incentive to encourage firms to pay fewer dividends because dividends were less valuable to them. We predict that firms with such investors would have reduced dividend payout, and find statistical evidence supporting this prediction. Our study provides new quasi-experimental evidence supporting the dividend clientele hypothesis.