Shareholder Illiquidity and Firm Behavior: Financial and Real Effects of the Personal Wealth Tax in Private Firms
47 Pages Posted: 29 Oct 2019 Last revised: 2 Jan 2020
Date Written: December 9, 2019
We examine how negative liquidity shocks to shareholders propagate to the firm. Analyzing regulatory changes to personal wealth taxation in Norway, we show that higher taxes on the home of private firms’ controlling shareholders are associated with higher dividend and salary payments from firms to shareholders and lower cash holdings, growth, and performance in firms. A one percentage-point increase in the shareholder’s wealth-tax-to-liquid-assets ratio is on average followed by a half percentage-point increase in the dividends-to-earnings ratio and a half percentage-point decrease in sales growth and profitability. These findings suggest that shareholder illiquidity has causal effects on firm behavior.
Keywords: household finance, corporate finance, illiquidity, taxes, wealth tax, dividends, cash holdings, growth, performance
JEL Classification: G32, G35
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