Shareholder Clienteles Research Articles

Dividend Paying Firm and Flexibility Hypothesis

Previous research suggests that firms substitute stock repurchases for dividend increases in response to higher cash flow volatility and/or higher tax rates on dividends relative to capital gains. However, when we separately examine repurchase decisions by dividend and non-dividend paying firms, we find little evidence that either cash flow uncertainty or reduced dividend tax rates after the Tax Act of 2003 induces the expected shifts in payments. Instead, we find that the two payout methods appear to have distinctly different shareholder clientele rather than being substitutes for each other.

Who financed the expansion of the equity market? Shareholder clienteles in Victorian Britain

Who financed the great expansion of the Victorian equity market, and what attracted them to invest? Using data on 453 firm-years and over 172,000 shareholders, we find that the largest providers of capital were rentiers, men with no formal occupation who relied on investment income. We also see a substantial growth in women investors as time progressed. In terms of clientele effects, we find that rentiers invested in large firms, whilst businessmen were the venture capitalists of young, regional enterprises. Women and the middle classes preferred safe investments, whilst financiers and institutional investors were speculators in foreign companies. Our results may help to explain the growth of new types of assets catering for particular clienteles, and the development of managerial policies on dividends and share issues.

Cyber-Risk Disclosure: Who Cares?

Cyber-risks have generated considerable interest in the media and in the public. Perhaps as a response, regulators are devoting an increasing amount of resources to improving corporate disclosure related to these risks. In contrast, we find that, despite this increased focus, cyber risk disclosures by publicly listed firms remain scant. Moreover, a qualitative analysis of five major cases as well as a systematic analysis of security price reactions upon the announcement of breaches shows that the effect on stock prices is very limited. We do not observe strong reactions after the breaches. A “Diff-in-Diff” analysis reveals that the change in operational performance, in executive departure likelihood, in shareholder clientele or in the amount of disclosure does not differ from the changes in a matched sample of firms that were not breached. This lack of reaction is inconsistent with a market or regulatory failure associated with the poor disclosure on cyber-risk.

Corporate Environmental Policy, Investor Response, and Shareholder Clienteles

Corporate Environmental Policy, Investor Response, and Shareholder Clienteles

The Existence of Tax Clienteles: An Australian Setting

There is little empirical evidence of company tax driving firm value in the finance literature though a change to Australian dividend imputation tax law in 1997 suggests the existence of dividend taxation induced tax clienteles. Recent changes to the regulation of the Australian dividend imputation system appears to have created two tax based shareholder clienteles determined by whether the shareholder is an Australian resident for tax purposes. A unique feature of this study is the focus on the value of franking credit balances, which have accumulated over time for many dividend paying Australian corporations. Analysis, using a sample of Australian listed companies over the period 2001 through 2006 (3071 firm-year observations), suggests that while Australian resident shareholders value franking credit balances, non-resident shareholders seem to attach little value to them and this has implications both for firm valuation.

Social Norms, Corporate Environmental Policy, and Shareholder Clienteles

Social Norms, Corporate Environmental Policy, and Shareholder Clienteles

Tax reform and payout policy: Do shareholder clienteles or payout policy adjust?

Changes in taxation of corporate dividends offer excellent opportunities to study dividend clientele effects. We explore payout policies and ownership structures around a major tax reform that took place in Finland in 2004. Consistent with dividend clienteles affecting firms' dividend policy decisions, we find that Finnish firms altered their dividend policies based on the changed tax incentives of their largest shareholders. While firms adjust their payout policies, our results also indicate that ownership structures of Finnish firms also changed around the 2004 reform, consistent with shareholder clienteles adjusting to the new tax system.

Investor Response to a Reduction in the Dividend Tax Rate: Evidence from the Jobs and Growth Tax Relief Reconciliation Act of 2003

ABSTRACT: This study examines investor reaction to the reduction in federal income tax rates on dividends resulting from passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA or the Tax Act). We investigate the existence of a clientele shift associated with the JGTRRA by examining trading volume in dividend-paying stocks surrounding passage of the Tax Act. Also, we examine changes in shareholder composition of firms over the period between announcement in the press and final passage of the plan. We find dividend yield to be a significant predictor of abnormal trading volume around key dates, including the date the plan to reduce dividend taxes was first covered in the press. Furthermore, we find a large and statistically significant negative relationship between dividend yield and the change in institutional ownership. Taken as a whole, our results are consistent with expectations that investor clienteles form around tax characteristics associated with particular firms and the ways that those firms structure investor returns. In particular, our results suggest that passage of the JGTRRA resulted in observable shifts in shareholder clienteles for dividend-paying firms.

Adding shareholder value through dividend policy: Evidence from the United Kingdom on tax-based shareholder clienteles

This paper addresses the question of dividend clienteles based on shareholder-level taxation. In the United Kingdom in 1997, radical changes were made to the way in which the dominant shareholder clientele was taxed on dividend income. These changes provided a unique quasi-experimental opportunity for a direct test of dividend clienteles, and of tax theories. This issue is central to policy formation, and to predicting the likely impact on shareholder value of changes to the dividend policy pursued by firms.Evidence is presented of two distinct tax-based clienteles in the United Kingdom, with contrasting preferences, one of which was strong enough to influence payout in the firms in which this clientele invested. The implication for South African firms is that, as the tax system changes, the payout preference of shareholders may also change. It is imperative that corporate financial managers react to these clienteles, and their requirements.

Managerial contracting and corporate social responsibility

This paper presents a theory of corporate social responsibility in the form of the private provision of public goods and private redistribution by a firm. These social expenditures are determined by a manager operating under a compensation contract chosen by shareholders in a capital market that prices social expenditures. The theory incorporates three explanations for compensation systems that encompass social performance. First, consumers may reward the firm for its social expenditures; second, managers may have personal preferences for contributing to social causes; and third, the shareholder clientele a firm attracts may prefer social expenditures. Social incentives are higher powered the more consumers reward the firm and the stronger are shareholders' warm glow preferences for social expenditures. Profit incentives are higher powered the more consumers reward the firm but are independent of shareholder preferences. When consumers reward the firm for its social expenditures, firms with higher ability managers have both higher operating profits and higher social expenditures when times are good, so a positive correlation is predicted. In bad times, however, the correlation is negative, except for firms with very low ability managers in very bad times, where the correlation is zero.

Managerial Contracting and Corporate Social Responsibility

This paper presents a positive theory of corporate social responsibility set in a managerial capitalism context in which managers instead of markets allocate resources, including social expenditures. The theory focuses jointly on the operational management of the firm and on its social expenditures as influenced by a compensation contract chosen by shareholders in a capital market that prices social expenditures. The theory provides three explanations for compensation systems that encompass social performance. First, consumers may reward the firm for its social expenditures; second, managers may have personal preferences for contributing to social causes; and third, the shareholder clientele a firm attracts may prefer social expenditures. The more consumers reward the firm for its social expenditures the higher powered are the profit incentives, so management compensation in increasing in corporate social expenditures. In the theory firms with higher ability managers have both higher operating profits and higher social expenditures when times are good, so a positive correlation is predicted. In bad times, however, the correlation is negative, except for firms with very low ability managers in very bad times, where the correlation is zero.

Clientele Change, Liquidity Shock, and the Return on Financially Distressed Stocks

We provide empirical evidence supporting the view that a sharp rise in a firm's default likelihood causes a change in its shareholder clientele: mutual funds decrease their holdings of the firm's share, trading volume and cost increase, and the order imbalance measure indicates large selling pressure. The liquidity risk of the stock as measured by its exposure to the Pastor and Stambaugh (2003) liquidity factor rises. Liquidity risk of the stock returns to normal in the subsequent month and the stock price recovers. Such price recovery explains the first-month abnormal high return earned by stocks with high default likelihood documented in Vassalou and Xing (2004). The abnormal high return is mostly reward for providing liquidity when it is most needed.

Do share prices matter?

This paper examines whether the cross sectional variation in Australian share prices is partially explained by measures of firm size and ownership characteristics in a manner that is consistent with firms behaving in accordance with Merton’s (1987) model of capital market equilibrium with incomplete information. Based on a sample of firms whose shares were traded on the ASX during 1995, we show that firms largely owned by less wealthy shareholders tend to have low stock prices, although this relation is not linear. In addition, larger, better–known, firms tend to have higher stock prices. These findings are consistent with prior evidence from US markets, and suggest the existence of a shareholder clientele effect in Australia that is related to the share price of the underlying firm.

Evidence of Tax-Clientele-Related Trading following Dividend Increases

The tax-clientele theory suggests that higher (lower) tax-rate investors should, ceteris paribus, concentrate their portfolios in tax-favored (explicitly taxed) assets. While evidence supporting the tax-clientele theory exists, research on tax-induced dividend clienteles for common stocks is mixed. This study examines trading activity, measured using daily transaction data, following dividend increases for evidence of shareholder clientele changes. Consistent with implications of the tax-induced dividend clientele theory, I document a strong positive association between dividend increase magnitude and post-dividend-increase trading activity. This result provides evidence that tax clienteles for dividend policies exists and that their effect is strong enough to influence investors' decisions. Further, consistent with dividend clienteles existing, I find that the relation between dividend-increase magnitude and postdividend-increase trading activity decreases with higher pre-dividend-increase dividend levels.

Evidence of imputation clienteles in the Australian equity market

This paper investigates the development of shareholder clienteles in response to the introduction of the Dividend Imputation (Integrated Tax System) into the Australian capital market. It is found that companies paying franked dividends have significantly increased dividend payments relative to companies paying little or no imputation tax credit. It is also shown that the use of dividend reinvestment plans has increased significantly post-imputation. This is interpreted as support for the existence of shareholder clienteles related to companies' imputation policies.

Managerial control of voting rights: Financing policies and the market for corporate control

This paper analyzes how managerial control of voting rights affects firm value and financing policies. It shows that an increase in the fraction of voting rights controlled by management decreases the probability of a successful tender offer and increases the premium offered if a tender offer is made. Depending on whether managerial control of voting rights is small or large, shareholders' wealth increases or falls when management strengthens its control of voting rights. Management can change the fraction of the votes it controls through capital structure changes, corporate charter amendments, and the acquisition of shareholder clienteles.

A test of dividend irrelevance using volume reactions to a change in dividend policy

Abstract We investigate the implication of clientele theories that changes in dividend policy should result in a marked increase in trading volume as shareholder clienteles change. With 192 firms announcing their first cash dividend we document both an increase in trading volume and firm value around the announcement date. We integrate these results to distinguish between the volume response to good news about the future and clientele adjustments to a change in dividend policy. Our results suggest that volume increases primarily in response to the signal about future earnings contained in the dividend. Clientele adjustments are small.