Private Firm and Shareholder Response to Dividend Taxation: Evidence from the Taxation of Corporate Minority Shareholders

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This paper examines the response of private firms and their shareholders to a dividend tax increase, which affects only a small group of shareholders. Using an exogenous shock in Germany, my results suggest that firms do not adjust their payout policy but corporate minority shareholders, the only ones affected by the increase in shareholder taxes, reduce their minority stakes in private firms after the dividend tax reform. Additional cross-sectional tests indicate a higher shareholder response, if corporate minority shareholders are financially distressed, own a minority stake in a firm with a high dividend payout and a majority shareholder, and do not belong to the same group as the firm in which they own a minority stake. My findings add to the very limited literature on the effects of dividend taxes on payout decisions of private firms and reactions of their shareholders.