Dividend Tax Clienteles: Evidence from Tax Law Changes
Posted: 9 Mar 2007 Last revised: 7 Aug 2008
Date Written: July 2008
We investigate institutional investors' preference for dividend-paying stocks following changes in the dividend tax penalty during the sample period from 1987 until 2004. Following prior literature we separate institutions into tax-advantaged and taxable cohorts and find that when the dividend tax penalty is positive, high-dividend firms constitute a significantly larger (smaller) percentage of tax-advantaged (taxable) institutions' portfolios. Multivariate regressions involving institutional ownership levels and changes confirm our initial findings. We estimate (for the median dividend-paying firm) when the dividend tax penalty decreases by 23.3%, we expect tax-advantaged (taxable) institutional ownership will decrease by 0.36% (increase by 0.25%) of a firm's shares outstanding. We find our results are robust for a subsample of firms that do not change their dividend policy. Overall, our paper provides strong support for the existence of institutional dividend tax clienteles.
Keywords: Institutions, Taxes, Dividend Tax Penalty, Dividends
JEL Classification: H24, G23, G35
Suggested Citation: Suggested Citation