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.

This paper documents that (1) special dividends were once commonly paid by NYSE firms, but are now rarely paid, (2) firms typically paid specials almost as predictably as they paid regular dividends; (3) despite the dramatic overall decline in specials, the incidence of very large specials increased in recent years; and (4) special dividends were not displaced by stock repurchases. Most plausibly, small specials disappeared because their predictability made them close substitutes for regular dividend signals, while large specials survived because their sheer size automatically differentiates them from regulars.

The authors thank The Global Association of Risk Professionals (GARP) for funding. We are especially grateful to Brian Bushee for providing his data on institutional ownership classifications. We thank Paul Zarowin and seminar participants at New York University, the London Business School, INSEAD, the University of Rochester, and Southern Methodist University for helpful suggestions on an earlier version of the paper, and David Barker, Matt Billett, Brian Bushee, Eric Lie, Anand Vijh, and seminar participants at the University of Iowa for comments on this version. Minton acknowledges financial support from the Dice Center for Research in Financial Economics. Investor clienteles and industry factor-price exposure We find robust evidence of investor clienteles for industry factor-price exposure: Investor interest, measured using share turnover and the number of institutions that hold a firm’s stock, is positively associated with stocks ’ industry exposure, and institutional investors systematically overweight (underweight) high (low) industry exposure stocks in their portfolios. Clientele effects are most pronounced in industries in which return correlation with the aggregate market is low, where the benefits from learning about industry risk and from substituting investment in high-exposure stocks for investment in the industry assets are greatest. Clientele effects are

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. # Allen is from the Wharton School at the University of Pennsylvania. Bernardo and Welch are from the Anderson School at UCLA. The authors thank Laurie Hodrick, Shlomo Benartzi, Charles Calomiris, Mark Grinblatt, Kathleen Fitzgerald, Avraham Kamara, Jiang Luo, Hamid Mehran, Avanidhar Subra...

This paper reviews domestic and multinational corporate tax research. For each topic, the theoretical arguments explaining how taxes can affect corporate decision-making and firm value are reviewed, followed by a summary of the related empirical evidence and a discussion of unresolved issues. Tax research generally supports the hypothesis that high-tax rate firms pursue policies that provide tax benefits. Many issues remain unresolved, however, including understanding whether tax effects are of first-order importance, why firms do not pursue tax benefits more aggressively, and whether corporate actions are affected by investor-level taxes. 574 Modigliani and Miller (1985) and Miller and Modigliani (1961) demonstrate that corporate financial decisions are irrelevant in a perfect, frictionless world. During the past 45 years, research has focused on whether financial decisions become relevant if capital markets are not

Please do not cite without author’s permission. In this paper, I test the dividend clientele hypothesis (DCH) by examining the impact of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the 2003 tax act) on household portfolio dividend yields. The DCH predicts that the 2003 tax act, which reduced the tax-disadvantage of dividends differentially across the income distribution, would cause high income households to shift their portfolios towards dividend paying stocks relatively more than lower income households. Using the 2001 and 2004 Surveys of Consumer Finances (SCF), I examine how changes in tax rates affect changes in household portfolio dividend yields. I find that the 2003 tax act caused households in the highest (35%) tax bracket to increase their portfolio dividend yields by 1.1 percentage points more than those in the next (33%) tax bracket, and by 2.6 percentage points more than those two tax brackets (28%) below. Compared to a 2.1 percent average dividend yield in 2001, these responses are large and economically significant. Using the 2007 SCF, I find that the reduced variation in dividend tax rates across households caused portfolio dividend yields to become homogeneous within three years of the tax act. Using a battery of sensitivity checks, I verify that these findings are not driven by other explanations for changes in dividend preferences, such as changes in optimism or risk-aversion. ∗I am grateful to my dissertation committee members, Amy Dittmar, Matthew Shapiro, Joel Slemrod and Jeff Smith for invaluable guidance, to Kevin Moore for assistance with using the Survey of Consumer