Taxes, stock ownership, and payout policy: Evidence from a 2011 tax reform in Japan

Kazuki Onji and Masanori Orihara
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Masanori Orihara: Policy Research Institute, Ministry of Finance,Japan

Discussion papers from Policy Research Institute, Ministry of Finance Japan

Abstract: The 2011 tax reform in Japan changed the definition of the large individual shareholders in the Japanese tax law. As a result of this tax reform, the top marginal tax rate on dividend income for individual investors whose ownership ratios were between 3 and 5% rose from 10 to 43.6%. This tax reform created an incentive for these investors to restrict their ownership stakes to below 3%. We find clear evidence of such ownership adjustments: 51.9% of 3-to-5%-stake investors sold their stocks before the tax hike. The percentage of sellers was 86.1% for those whose ownership ratios were between 3 and 3.1%. We exploit this tax reform to examine whether investors f tax preferences affected firms f payout policy. Individual investors who retained stakes of at or more than 3% after the tax reform had an incentive to encourage firms to pay fewer dividends because dividends were less valuable to them. We predict that firms with such investors would have reduced dividend payout, and find statistical evidence supporting this prediction. Our study provides new quasi-experimental evidence supporting the dividend clientele hypothesis.

Keywords: large shareholder; payout policy; stock selling; natural experiment (search for similar items in EconPapers)
JEL-codes: G32 G35 G38 H24 H25 H26 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2016-04
New Economics Papers: this item is included in nep-pbe and nep-pub
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