Dividend Taxation and the Ownership Structure of Private Firms

Journal of Corporate Finance, forthcoming

58 Pages Posted: 19 Oct 2020 Last revised: 6 Feb 2023

See all articles by Lisa Hillmann

Lisa Hillmann

WHU - Otto Beisheim School of Management

Date Written: January 27, 2023

Abstract

This paper examines the effect of dividend taxation on the ownership structure of private firms. I exploit a German dividend tax increase that only affects corporate shareholders owning a minority stake. Using data on private German firms and their shareholders, I find that corporate shareholders reduce their minority stakes in firms after the dividend tax reform. This result is in line with the notion that, because minority shareholders do not have sufficient decision-making power to influence the payout policy, they can only react to a dividend tax increase by selling their shares. This effect is larger when the affected minority shareholders face high dividend tax costs. However, I find a smaller effect when the benefits of the minority stakes are highly relevant for the firm and the affected shareholders, suggesting that non-tax factors mute the response to dividend taxes. In addition, I find that the largest shareholder of the firm buys the minority stake, resulting in greater ownership concentration. These findings extend the prior literature that finds no effect of dividend taxes on the ownership structure of private firms.

Keywords: dividend taxation, closely held corporations, private firms, minority shareholders, corporate shareholders

JEL Classification: G32, G35, H25

Suggested Citation

Hillmann, Lisa, Dividend Taxation and the Ownership Structure of Private Firms (January 27, 2023). Journal of Corporate Finance, forthcoming, Available at SSRN: https://ssrn.com/abstract=3683813 or http://dx.doi.org/10.2139/ssrn.3683813

Lisa Hillmann (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

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