Payout Policy Changes around a Tax Reform: Do Owners or Payout Policy Adjust?

Abstract

Tax reforms which affect the taxation of corporate dividends offer excellent opportunities to study dividend clientele effects. We study payout policy changes (dividends and share repurchases) around a major tax reform in Finland in 2004. Contrary to e.g. survey results by Brav et al (2005), who report that executives believe that dividend policies have little impact on their investor clientele, and that tax considerations play a secondary role, we find that firms adjust their dividend policies in line with the preferences of their main shareholders. We also find that dividend preferences play a significant role in explaining ownership structures in Finnish firms.