Why Do Companies Pay Dividends?

50 Pages Posted: 1 Mar 2001 Last revised: 20 Aug 2010

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased); Harvard University (deceased)

Jerry Green

Harvard University, HBS Negotiations, Organizations and Markets Unit; Dept. of Economics; National Bureau of Economic Research (NBER)

Date Written: December 1979

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 be retained 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 show 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.

Suggested Citation

Feldstein, Martin S. and Green, Jerry R., Why Do Companies Pay Dividends? (December 1979). NBER Working Paper No. w0413, Available at SSRN: https://ssrn.com/abstract=262041

Martin S. Feldstein (Contact Author)

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Jerry R. Green

Harvard University, HBS Negotiations, Organizations and Markets Unit; Dept. of Economics ( email )

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National Bureau of Economic Research (NBER)

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