A Test of the Theory of Tax Clienteles for Dividend Policies

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Abstract
The theory of tax clienteles for dividend policies predicts that after a firm initiates a cash dividend, the ownership of its equity by tax-exempt/tax-deferred and corporate investors will increase as these investors purchase shares of stock that are being sold by individual investors for whom dividends are tax disadvantaged. This study provides support for this prediction. This result, which is not well explained by omitted time-dependent factors or potentially relevant nontax factors, offers convincing new evidence that the effects of tax clienteles for dividend policies are strong enough to influence the decisions of investors.