A Theory of Dividends Based on Tax Clienteles

Franklin Allen, Antonio E. Bernardo and Ivo Welch

Journal of Finance, 2000, vol. 55, issue 6, 2499-2536

Abstract: This paper explains why some firms prefer to pay dividends rather than repurchase shares. When institutional investors are relatively less taxed than individual investors, dividends induce “ownership clientele” effects. Firms paying dividends attract relatively more institutions, which have a relative advantage in detecting high firm quality and in ensuring firms are well managed. The theory is consistent with some documented regularities, specifically both the presence and stickiness of dividends, and offers novel empirical implications, e.g., a prediction that it is the tax difference between institutions and retail investors that determines dividend payments, not the absolute tax payments.

Date: 2000
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Citations: View citations in EconPapers (297)

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https://doi.org/10.1111/0022-1082.00298

Related works:
Working Paper: A Theory of Dividends Based on Tax Clienteles (1998)
Working Paper: A Theory of Dividends Based on Tax Clienteles
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