Dividend Taxation and the Ownership Structure of Private Firms

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 have no decision making rights to influence the payout policy, they can only react to the reform by selling their shares. The effect is larger for minority shareholders with liquidity needs and for minority shareholders facing shareholder conflicts. In addition, I find that the largest shareholder of the firm buys the minority stake, resulting in greater ownership concentration. My 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