Dividends, Share Repurchases, and Tax Clienteles: Evidence from the 2003 Reductions in Shareholder Taxes

The Accounting Review ◽

10.2308/accr.00000038 ◽

2011 ◽

Vol 86 (3) ◽

pp. 887-914 ◽

Cited By ~ 68

Author(s):

Jennifer L. Blouin ◽

Jana S. Raedy ◽

Douglas A. Shackelford

Keyword(s):

Generalized Method Of Moments ◽

Capital Gains ◽

Share Repurchases ◽

Individual Investors ◽

Tax Rates ◽

Capital Gains Tax ◽

Firm Level ◽

Shareholder Taxes ◽

Tax Returns ◽

Directors And Officers

ABSTRACT: This study jointly evaluates firm-level changes in investor composition and shareholder distributions following a 2003 reduction in the dividend and capital gains tax rates for individuals. We find that directors and officers, but not other individual investors, rebalanced their portfolios to maximize after-tax returns in light of the new tax rules. We also find that firms adjusted their distribution policy (specifically, dividends versus share repurchases) in a manner consistent with the altered tax incentives for individual investors. To our knowledge, this is the first study to employ simultaneous equations to estimate both shareholder and managerial responses to the 2003 rate reductions. We find that the generalized method of moments (GMM) estimates are substantially stronger than OLS estimates, consistent with our expectation that investor and manager responses are simultaneously determined. Failure to estimate systems of equations may account for some of the weak and conflicting results from prior studies of the 2003 rate reductions.

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The Effect of Shareholder Taxes on Corporate Payout Choice

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109000003471 ◽

2007 ◽

Vol 42 (4) ◽

pp. 991-1019 ◽

Cited By ~ 29

Author(s):

William J. Moser

Keyword(s):

Institutional Ownership ◽

Capital Gain ◽

Share Repurchases ◽

Tax Rates ◽

Share Ownership ◽

Shareholder Taxes ◽

The Difference ◽

Dividend Tax

abstractThis study investigates whether the difference in individual shareholder tax rates between dividend income and capital gain (the dividend tax penalty) affects a firm's choice between distributing funds to shareholders through dividends or share repurchases. The results of this study suggest that, in periods in which the dividend tax penalty increases, firms are more likely to distribute funds to shareholders through share repurchases as opposed to dividends. The results also indicate that the relation between the dividend tax penalty and corporate payout choice is affected by the types of shareholders who own stock in the firm. As tax-disfavored institutional ownership increases and the dividend tax penalty increases, firms are more likely to repurchase shares as opposed to distributing dividends. In contrast, as tax-favored institutional ownership increases and the dividend tax penalty increases, firms are less likely to repurchase shares as opposed to distributing dividends. As senior managerial share ownership increases and the dividend tax penalty increases, firms are more likely to make distributions to shareholders in the form of share repurchases.

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