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Why Do Companies Pay Dividends?

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

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.

JEL Classifications: 32, 52

Working Paper Series

Date posted: March 01, 2001 ; Last revised: January 30, 2002

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

Martin S. Feldstein (Contact Author)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-868-3905 (Phone)
617-868-7194 (Fax)
Harvard University ( email )
Littauer Center
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-2167 (Phone)
617-496-5444 (Fax)
Jerry R. Green
Harvard University, HBS Negotiations, Organizations and Markets Unit; Dept. of Economics ( email )
Soldiers Field
Boston, MA 02163
United States
617-495-3950 (Phone)
617-495-6859 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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