Payout Policy, Taxes, and Corporate Insiders: Evidence from the German Tax Reform 2001

Abstract:     
Based on a large panel data set of listed German firms we analyze the corporate payout behavior around the German Tax Reduction Act 2001 (GTRA). The GTRA considerably changed the tax preference of shareholders and consequently affected the attractiveness of different forms of payout. Using the tax reform as an exogenous source of variation we examine whether payout decisions are driven by corporate insiders or by influential shareholders. We find that the tax reform reduced both the propensity to pay out dividends as well as their size. However, we find that in those firms where management board members hold substantial stakes, dividend payout behavior has not changed in the aftermath of the GTRA enactment. This effect does not depend on the existence of other influential shareholders, as for instance institutional shareholders. Hence, we conclude that the dividend policy is strongly driven by corporate insiders.

Number of Pages in PDF File: 34

Keywords: corporate governance, clientele effect, dividend policy, ownership structure, payout policy, share repurchases, taxes, tax reform

JEL Classification: G32, G35, G38

Accepted Paper Series