Dividend Tax Clienteles: Evidence from Tax Law Changes

Posted: 9 Mar 2007 Last revised: 7 Aug 2008

See all articles by Andy Puckett

Andy Puckett

University of Tennessee, Knoxville

William J. Moser

Miami University

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

Puckett, Andy and Moser, William J., Dividend Tax Clienteles: Evidence from Tax Law Changes (July 2008). Journal of American Taxation Association, Forthcoming, Available at SSRN: https://ssrn.com/abstract=969168

Andy Puckett

University of Tennessee, Knoxville ( email )

437 Stokely Managment Center
Knoxville, TN 37996
United States

William J. Moser (Contact Author)

Miami University ( email )

2027 Farmer School of Business
800 East High Street
Oxford, OH 45056
United States
513-529-8284 (Phone)

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