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

Jim Hsieh · Qinghai Wang

36 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Corporate Finance and Governance Financial Markets and Investment Strategies Corporate Taxation and Avoidance

Abstract

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.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1961Dividend Policy, Growth, and the Valuation of Shares 1985The Structure of Corporate Ownership: Causes and Consequences 1985Dividend Policy under Asymmetric Information 1956DISTRIBUTION OF INCOMES OF CORPORATIONS AMONG DIVIDENDS, RETAINED EARNINGS AND TAXES 1984Two Agency-Cost Explanations of Dividends 1979Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy 1999Understanding the determinants of managerial ownership and the link between ownership and performance

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2018Managerial Ability and the Shareholder Tax Sensitivity of Dividends 2010Controlling Shareholders and Payout Policy: Do Founding Families Have a Special 'Taste for Dividends'?

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