Working Paper: NBER ID: w13283
Authors: Mihir A. Desai; Li Jin
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.
Keywords: dividend policy; institutional investors; tax incentives; payout policy
JEL Codes: G32; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher proportion of dividend-averse institutional shareholders (G35) | less likely to pay dividends (G35) |
| exogenous changes in dividend policies (G35) | shifts in institutional ownership patterns (G34) |
| changes in tax codes (H26) | managers adjust their dividend policies (G35) |
| predicted dividend payments (G35) | changes in institutional ownership patterns (G34) |