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Why Do Companies Pay Dividends?
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MARTIN S. FELDSTEIN
National Bureau of Economic Research (NBER); Harvard University
JERRY GREEN
Harvard University, HBS Negotiations, Organizations and Markets Unit; Dept. of Economics; National Bureau of Economic Research (NBER)
December 1979
NBER Working Paper No. W0413
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Abstract:
This paper presents a simple model of market equilibrium to explain why firms that maximize the value of their shares pay dividends even though the funds could instead by retained and and subsequently distributed to shareholders in a way that would allow them to be taxed more favorably as capital gains. The two principal ingredients of our explanation are: (1) the conflicting preferences of shareholders in different tax brackets and (2) the shareholders' desire for portfolio diversification, we should that companies will pay a positive fraction of earnings in dividends. We also provide some comparative static analysis of dividend behavior with respect to tax parameters and to the conditions determining the riskiness of the securities.
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JEL Classifications: 32, 52
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Working Paper Series
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Suggested Citation
Feldstein, Martin S. and Green, Jerry R., "Why Do Companies Pay Dividends?"
(December 1979).
NBER Working Paper No. W0413. Available at SSRN: http://ssrn.com/abstract=262041
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Contact Information for
MARTIN
S.
FELDSTEIN
(Contact Author)
Email address for MARTIN
S.
FELDSTEIN
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge
, MA
02138
United States
617-868-3905 (Phone)
617-868-7194 (Fax)
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Email address for MARTIN
S.
FELDSTEIN
Harvard University
Littauer Center
1050 Massachusetts Avenue
Cambridge
, MA
02138
United States
617-495-2167 (Phone)
617-496-5444 (Fax)
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Contact Information for
JERRY
GREEN
Email address for JERRY
GREEN
Harvard University, HBS Negotiations, Organizations and Markets Unit; Dept. of Economics
Soldiers Field
Boston
, MA
02163
United States
617-495-3950 (Phone)
617-495-6859 (Fax)
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(No e-mail address available for JERRY
GREEN
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge
, MA
02138
United States
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