Large Shareholders and Dividends: Evidence from U.S. Tax Reforms
43 Pages Posted: 20 Nov 2002
Date Written: September 2002
Abstract
This paper tests whether firms' dividend policy is determined by the preferences of their large shareholders. Exogenous variation from changing personal income tax rates is used to analyze dividend payments of firms whose large shareholders were affected by these reforms (individuals), compared to a control group of firms whose large shareholders were not. The evidence shows that dividend payouts increased in years when dividend income was less tax-disadvantaged relative to capital gains, and decreased as this tendency was reverted, but only for firms whose large shareholders were affected by these tax reforms. Furthermore, using ex-dividend day stock price analysis I find significant increases in the valuation of dividend income for those firms with individual large shareholders in periods when dividends were less tax-disadvantaged. These results show that large shareholders influence dividend decisions, and provide strong evidence of the existence of tax clienteles.
Keywords: large shareholders, dividends, taxation, corporate governance, payout, personal taxes
JEL Classification: G32, G34, H24, H25
Suggested Citation: Suggested Citation
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