Dividends, Share Repurchases, and Tax Clienteles: Evidence from the 2003 Reductions in Shareholder Taxes

45 Pages Posted: 29 Jun 2010 Last revised: 29 Jul 2010

See all articles by Jennifer Blouin

Jennifer Blouin

University of Pennsylvania - Accounting Department

Jana Smith Raedy

University of North Carolina at Chapel Hill

Douglas A. Shackelford

University of North Carolina Kenan-Flagler Business School; National Bureau of Economic Research (NBER)

Date Written: June 2010

Abstract

This paper jointly evaluates firm-level changes in investor composition and shareholder distributions following a 2003 reduction in the dividend and capital gains tax rates for individuals. We find that directors and officers, but not other individual investors, rebalanced their portfolios to maximize after-tax returns in light of the new tax rules. We also find that firms adjusted their distribution policy (specifically, dividends versus share repurchases) in a manner consistent with the altered tax incentives for individual investors. To our knowledge, this is the first paper to employ simultaneous equations to estimate both investor and managerial responses to the 2003 rate reductions. We find that estimating a system of equations leads to different inferences.

Suggested Citation

Blouin, Jennifer and Smith Raedy, Jana and Shackelford, Douglas A., Dividends, Share Repurchases, and Tax Clienteles: Evidence from the 2003 Reductions in Shareholder Taxes (June 2010). NBER Working Paper No. w16129, Available at SSRN: https://ssrn.com/abstract=1630134

Jennifer Blouin (Contact Author)

University of Pennsylvania - Accounting Department ( email )

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Jana Smith Raedy

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-7475 (Phone)
919-962-4727 (Fax)

Douglas A. Shackelford

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3197 (Phone)
919-962-4727 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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