Institutional Tax Clienteles and Payout Policy

Mihir A. Desai and Li Jin

No 13283, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper employs heterogeneity in institutional shareholder tax characteristics to identify the relationship between firm payout policy and tax incentives. Analysis of a panel of firms matched with the tax characteristics of the clients of their institutional shareholders indicates that "dividend-averse" institutions are significantly less likely to hold shares in firms with larger dividend payouts. This relationship between the tax preferences of institutional shareholders and firm payout policy could reflect dividend-averse institutions gravitating to low dividend paying firms or managers adapting their payout policies to the interests of their institutional shareholders. Evidence is provided that both effects are operative. Instrumental variables analysis indicates that plausibly exogenous changes in payout policy result in shifting institutional ownership patterns. Similarly, exogenous changes in the tax code indicate that as the tax cost of paying dividends changes, managers alter their dividend policy to serve their institutional shareholders.

JEL-codes: G32 H24 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-pbe
Note: AP CF PE
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Citations: View citations in EconPapers (5)

Published as Desai, Mihir, and Li Jin. "Institutional Tax Clienteles and Payout Policy." Journal of Financial Economics 100, no. 1 (April 2011): 68–84.

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