A Theory of Dividends Based on Tax Clienteles

Franklin Allen (), Antonio Bernardo () and Ivo Welch ()
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Antonio Bernardo: Finance Area

Yale School of Management Working Papers from Yale School of Management

Abstract: This paper offers a novel explanation for why some firms prefer to pay dividends rather than repurchase shares. It is well-known that institutional investors are relatively less taxed than individual investors, and that this induces "dividend clientele" effects. We argue that these clientele effects are the very reason for the presence of dividends, because institutions have a relative advantage in monitoring firms or in detecting firm quality. Firms paying dividends attract relatively more institutions and perform better. The theory is consistent with some documented regularities, such as a reluctance of firms to cut dividends, and offers novel empirical implications, such as a prediction that is the tax difference between institutions and retail investors that determines dividend payments, not the absolute tax payments.

JEL-codes: G35 (search for similar items in EconPapers)
Date: 1998-06-25
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Related works:
Working Paper: A Theory of Dividends Based on Tax Clienteles
Journal Article: A Theory of Dividends Based on Tax Clienteles (2000)
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Persistent link: http://EconPapers.repec.org/RePEc:ysm:somwrk:ysm92

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