Hostname: page-component-cd9895bd7-mkpzs Total loading time: 0 Render date: 2024-12-25T07:26:33.308Z Has data issue: false hasContentIssue false
  • English
  • Français

Insiders' Tax Preferences and Firms' Choices between Dividends and Share Repurchases

Published online by Cambridge University Press:  06 April 2009

Jim Hsieh  and
Qinghai Wang
Jim Hsieh
Affiliation:
[email protected], School of Management, George Mason University, Fairfax, VA 22030
Qinghai Wang
Affiliation:
[email protected], College of Management, Georgia Institute of Technology, Atlanta, GA 30308.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper investigates whether corporate payout policy is associated with insiders' share holdings and their tax preferences. We find that insider ownership and the implied tax liabilities are positively related to a firm's propensity to employ share repurchases. Firms with higher levels of or greater increases in insider ownership prefer stock repurchases to cash dividends. This relation is more significant in years when dividends were more tax disadvantaged relative to capital gains. Our findings are robust to the endogeneity of insider ownership and the inclusion of various control variables such as firm size, permanence of cash flows, growth opportunities, institutional ownership, and executive stock options. Overall, our results suggest that personal tax considerations from insiders affect corporate payout decisions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 1 , March 2008 , pp. 213 - 244
Copyright
Copyright © School of Business Administration, University of Washington 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Agrawal, A., and Jayaraman, N.. “The Dividend Policies of All-equity Firms: A Direct Test of the Free Cash Flow Theory.” Managerial and Decision Economics, 15 (1994), 139–148.CrossRefGoogle Scholar
Aharony, J., and Swary, I.. “Quarterly Dividend and Earnings Announcements and Shareholders' Returns: An Empirical Analysis.” Journal of Finance, 35 (1980), 1–12.CrossRefGoogle Scholar
Allen, F.; Bernardo, A.; and Welch, I.. “A Theory of Dividends Based on Tax Clienteles.” Journal of Finance, 55 (2000), 2499–2536.CrossRefGoogle Scholar
Allen, F., and Michaely, R.. “Payout Policy.” In Handbook of the Economics, Harris, M., Stulz, R., and Constantinides, R., eds. Amsterdam: North-Holland (2003).Google Scholar
Asquith, P., and Mullins, D. W. Jr, “The Impact of Initiating Dividend Payments on Shareholders' Wealth.” Journal of Business, 56 (1983), 77–96.CrossRefGoogle Scholar
Auerbach, A.; Burman, L. E.; and Siegel, J. M.. “Capital Gains Taxation and Tax Avoidance: New Evidence from Panel Data.” In Does Atlas Shrug? The Economic Consequences of Taxing the Rich, Slemrod, J., ed. Cambridge, MA: Harvard University Press (2000).Google Scholar
Barclay, M. J.; Holderness, C. G.; and Sheehan, D. P.. “Dividends and Corporate Shareholders.” Review of Financial Studies, forthcoming (2008).CrossRefGoogle Scholar
Bhattacharya, S. “Imperfect Information, Dividend Policy and the Bird-in-Hand Fallacy.” Bell Journal of Economics, 10 (1979), 259–270.CrossRefGoogle Scholar
Blouin, J. L.; Raedy, J. S.; and Shackelford, D. A.. “The Initial Impact of the 2003 Reduction in the Dividend Tax Rate.” Working Paper, University of Pennsylvania and University of North Carolina (2004).Google Scholar
Brav, A.; Graham, J. R.; Harvey, C. R.; and Michaely, R.. “Payout Policy in the 21st Century.” Journal of Financial Economics, 77 (2005), 483–527.CrossRefGoogle Scholar
Brennan, M. J. “Taxes, Market Valuation and Financial Policy.” National Tax Journal, 23 (1970), 417–429.CrossRefGoogle Scholar
Brennan, M. J., and Thakor, A. V.. “Shareholder Preferences and Dividend Policy.” Journal of Finance, 45 (1990), 993–1018.CrossRefGoogle Scholar
Brown, J. R.; Liang, N.; and Weisbenner, S.. “Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut.” Journal of Finance, 62 (2007), 1935–1965.CrossRefGoogle Scholar
Chetty, R., and Saez, E.. “Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut.” Quarterly Journal of Economics, 120 (2005), 791–833.Google Scholar
Cho, M.-H. “Ownership Structure, Investment, and the Corporate Value: An Empirical Analysis.” Journal of Financial Economics, 47 (1998), 103–121.CrossRefGoogle Scholar
Coles, J. L.; Lemmon, M. L.; and Meschke, J. F.. “Structural Models and Endogeneity in Corporate Finance.” Working Paper, Arizona State University and University of Utah (2003).Google Scholar
Constanstinides, G. M. “Optimal Stock Trading with Personal Taxes.” Journal of Financial Economics, 13 (1984), 65–89.CrossRefGoogle Scholar
DeAngelo, H.; DeAngelo, L.; and Skinner, D.. “Are Dividends Disappearing? Dividend Concentration and the Consolidation of Earnings.” Journal of Financial Economics, 72 (2004), 425–456.CrossRefGoogle Scholar
Demsetz, H. “The Structure of Ownership and the Theory of the Firm.” Journal of Law and Economics, 26 (1983), 375–390.CrossRefGoogle Scholar
Demsetz, H., and Lehn, K.. “The Structure of Corporate Ownership: Causes and Consequences.” Journal of Political Economy, 93 (1985), 1155–1177.CrossRefGoogle Scholar
Demsetz, H., and Villalonga, B.. “Ownership Structure and Corporate Performance.” Journal of Corporate Finance, 7 (2001), 209–233.CrossRefGoogle Scholar
Dittmar, A., and Dittmar, R.. “Stock Repurchase Waves: An Explanation of the Trends in Aggregate Corporate Payout Policy.” Working Paper, University of Michigan (2005).Google Scholar
Easterbrook, F. “Two Agency Costs Explanations of Dividends.” American Economic Review, 74 (1984), 650–659.Google Scholar
Feldstein, M., and Green, J.. “Why Do Companies Pay Dividends?” American Economic Review, 73 (1983), 17–30.Google Scholar
Fenn, G. W., and Liang, N.. “Corporate Payout Policy and Managerial Stock Incentives.” Journal of Financial Economics, 60 (2001), 45–72.CrossRefGoogle Scholar
Graham, J., and Kumar, A.. “Do Dividend Clienteles Exist? Evidence on Dividend Preferences of Retail Investors.” Journal of Finance, 61 (2006), 1305–1336.CrossRefGoogle Scholar
Grinstein, Y., and Michaely, R.. “Institutional Holdings and Payout Policy.” Journal of Finance, 60 (2005), 1389–1426.CrossRefGoogle Scholar
Grullon, G., and Michaely, R.. “Dividends, Repurchases, and the Substitution Hypothesis.” Journal of Finance, 57 (2002).CrossRefGoogle Scholar
Guay, W., and Harford, J.. “The Cash-flow Permanence and Information Content of Dividend Increases versus Repurchases.” Journal of Financial Economics, 57 (2000), 385–415.CrossRefGoogle Scholar
Himmelberg, C. P.; Hubbard, R. G.; and Palia, D.. “Understanding the Determinants of Managerial Ownership and the Link between Ownership and Performance.” Journal of Financial Economics, 53 (1999), 353–384.CrossRefGoogle Scholar
Holderness, C. G., and Sheehan, D.. “Constraints on Large-Block Shareholders.” In Concentrated Corporate Ownership, Morck, R. K., ed. University of Chicago Press: NBER (2000).Google Scholar
Hovakimian, A.; Opler, T.; and Titman, S.. “The Debt-Equity Choice.” Journal of Financial and Quantitative Analysis, 36 (2001), 1–24.CrossRefGoogle Scholar
Hsieh, J., and Wang, Q.. “Determinants of the Trends in Aggregate Corporate Payout Policy.” Working Paper, George Mason University (2006).Google Scholar
Ikenberry, D.; Lakonishok, J.; and Vermaelen, T.. “Market Underreaction to Open Market Share Repurchases.” Journal of Financial Economics, 39 (1995), 181–208.CrossRefGoogle Scholar
Jagannathan, M.; Stephens, C. P.; and Weisbach, M. S.. “Financial Flexibility and the Choice between Dividends and Stock Repurchases.” Journal of Financial Economics, 57 (2000), 355–384.CrossRefGoogle Scholar
Jensen, G.; Solberg, D.; and Zorn, T.. “Simultaneous Determination of Insider Ownership, Debt, and Dividend Policies.” Journal of Financial and Quantitative Analysis, 27 (1992), 247–263.CrossRefGoogle Scholar
Jensen, M. C. “Agency Costs of Free Cash Flow.” American Economic Review, 76 (1986), 323–329.Google Scholar
Lintner, J. “Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes.” American Economic Review, 46 (1956), 97–113.Google Scholar
McConnell, J. J.; Servaes, H.; and Lins, K. V.. “Changes in Equity Ownership and Changes in the Market Value of the Firm.” Working Paper, Purdue University (2003).CrossRefGoogle Scholar
Michaely, R.; Thaler, R. H.; and Womack, K.. “Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?” Journal of Finance, 50 (1995), 573–608.CrossRefGoogle Scholar
Michaely, R., and Vila, J.-L.. “Investors' Heterogeneity, Prices and Volume around the Ex-Dividend Day.” Journal of Financial and Quantitative Analysis, 30 (1995), 171–198.CrossRefGoogle Scholar
Miller, M., and Modigliani, F.. “Dividend Policy, Growth, and the Valuation of Shares.” Journal of Business, 34 (1961), 411–433.CrossRefGoogle Scholar
Miller, M., and Rock, K.. “Dividend Policy under Asymmetric Information.” Journal of Finance, 40 (1985), 1031–1051.CrossRefGoogle Scholar
Miller, M., and Scholes, M.. “Dividends and Taxes.” Journal of Financial Economics, 6 (1978), 333–364.CrossRefGoogle Scholar
Naranjo, A.; Nimalendran, M.; and Ryngaert, M.. “Stock Returns, Dividend Yield and Taxes.” Journal of Finance, 53 (1998), 2029–2057.CrossRefGoogle Scholar
Perez-Gonzalez, F. “Large Shareholders and Dividends: Evidence from U.S. Tax Reforms.” Working Paper, Columbia University (2003).Google Scholar
Poterba, J., and Summers, L.. “The Economic Effects of Dividend Taxation.” In Recent Advances in Corporate Finance, Altman, E. and Subramanyam, M., eds. Homewood, IL: Irwin (1985).Google Scholar
Weisbenner, S. J. “Corporate Share Repurchases in the 1990s: What Role Do Stock Options Play?” Working Paper, Federal Reserve Board, Washington, DC (2000).Google Scholar