Why Do Companies Pay Dividends?

Martin Feldstein and Jerry Green

Scholarly Articles from Harvard University Department of Economics

Abstract: This paper presents a simple model of market equilibrium to explain why firms that maximize the value of their shares pay dividends even though the funds could instead be retained and subsequently distributed to shareholders in a way that would allow them to be taxed more favorably as capital gains. The two principal ingredients of our explanation are: (1) the conflicting preferences of shareholders in different tax brackets and (2) the shareholders' desire for portfolio diversification, we show that companies will pay a positive fraction of earnings in dividends. We also provide some comparative static analysis of dividend behavior with respect to tax parameters and to the conditions determining the riskiness of the securities.

Date: 1983
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Citations: View citations in EconPapers (39)

Published in American Economic Review

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Related works:
Journal Article: Why Do Companies Pay Dividends? (1983)
Working Paper: Why Do Companies Pay Dividends? (1979)
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:3204679

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