1. Payout Policy Changes around a Tax Reform: Do Owners or Payout Policy Adjust?
Timo Korkeamäki, Eva Liljeblom, Daniel Pasternack
Hanken School of Economics, Helsinki, Finland

2. Previous research I
Mixed evidence on whether dividend clienteles affect corporate dividend decisions
Recent evidence been provided on dividend clienteles in studies of
institutional investors, Dhaliwal et al (1999), Grinstein & Michaely (2005),
retail investors, Graham and Kumar (2006), or
half of an entire market , Dahlquist et al (2006).
But do firms take dividend clienteles into account in setting payout policies?
YES: Perez-Gonzales (2003), Chetty and Saez (2005), Renneboog & Trojanowski (2005), Jin (2006), Brown et al (2007), Blouin et al (2007)
NO: Brav et al (2005), Barclay et al (2009)

3. Previous research II & Research question
And, if firms do not adjust to dividend clienteles, do long-term investors move?
Hotchkiss & Lawrence (2007): support the notion that investors adjust around dividend changes
Desai and Jin (2008): evidence for investors gravitating to low dividend firms
Research question: Do dividend clienteles affect corporate payout decisions?
And follow up: If not, do owners adjust?

4. Background
A major tax reform in Finland in 2004, which changed the dividend taxation for private investors and certain firms
Dividend tax from 0% to 19.6% => from avoir fiscal to a partial capital gains taxation (70% of a dividend amount taxed at 26%)
Few different investor tax categories => a large change, and clear groups of affected vs. unaffected investors (such as taxed domestic private, vs. foreign investors)
The reform known ex ante: firm could adjust their dividends not only after the reform, but also pre-reform

5. Contribution Contributes to studies outside U.S.
Denis & Osobov (2008): ”Outside the U.S., there is little evidence of a systematic positive relation between relative prices and dividend paying and non-paying firms and the propensity to pay dividends. These findings cast doubt on signaling, clientele and catering explanations for dividends, but support agency cost-based lifecycle theories.”
Contributes to studies of whether firms or investors adjust by studying both aspects (the interactions) around a major tax reform
Studies a market with substantial cross-sectional variation in both taxational aspects as well as ownership concentration => enhances chances to find significant differences
Studies both dividend policies and well as share repurchases

6. Data & Method Method: we analyze both Data for
dividend payments for accounting years of 2002 to 2005 (2 pre-reform, 2 post-reform years)
corresponding financials from last year-end
annual share repurchases
data on 5 largest owners: equity held, and tax status => we form a variable Tax_of_5, measuring the relative share of taxationally affected owners out of 5 largest owners (Tax_of_5 group largely measures private domestic owners)
Method: we analyze both
separate dividend, share repurchase, and ownership (Tax_of_5) equations, and
simultaneous 3SLS estimations.

7. Models Dividends Share repurchases Ownership
PAYRATt = f (ROAt , PAYRATt-1, YEAR_D, Tax_of_5, Interactions, Controls, )
Share repurchases
SHREP/TOTPAYt = f (YEAR_D, Tax_of_5, Interactions , Controls)
Ownership
Tax_of_5 = f (PAYRAT, SHREP/TOTPAY, Interactions, Controls)

8. Results: Descriptive statistics I
Pre-reform, higher yields if more ”private domestic” owners (Panel B)
Dividend payout ratios radically increase in last pre-reform year in firms with more large, tax-affected owners (Panel A)
After the reform, a convergence in yields in the 2 groups (Panel B)

9. Results: Descriptive statistics II
Share repurchases increase after the reform, and converge in the 2 groups

10. Dividend model Significantly lower dividends after the reform
A significantly positive relationship between the pay-out ratio for the last pre-reform year, and the proportion of large, taxationally affected owners

11. Share repurchase regression
Only the post-reform year dummy significant
Foreign ownership also significant

12. Ownership model I
Ownership concentration by private doemstic owners higher in smaller, less leveraged firms with higher market-to-book values
Results also support the idea of private owners preferring dividends, disliking share repurchases

13. Simultaneous equations
Results robust as compared to the 3 stand-alone models

15. Robustness tests
Results hold in various specifications

17. Conclusions Results support
that there are dividend clienteles
the significant payout variables in ownership models,
that firms take clienteles into account when setting payout policies
the significant changes in dividend payouts around the reform
the sign. relationship between taxed owners and the change in dividends
We do not find evidence on owners migrating.

18. Thank you!