A Test of the Theory of Tax Clienteles for Dividend Policies

The theory of tax clienteles for dividend policies predicts that tax-exempt/tax-deferred and corporate investors will increase their ownership of the equity of firms that initiate a cash dividend as these investors purchase shares of stock that are being sold by individual investors for whom dividends are tax-disadvantaged. We analyze the change in stock ownership for a sample of firms that initiate a cash dividend and find evidence that is consistent with this theory. These results offer convincing new evidence that the effects of tax clienteles for dividend policies are strong enough to influence the decisions of investors