Institutional Dividend Clienteles Under an Imputation Tax System

Abstract

Shareholdings for a sample of institutional equity funds, operating under the Australian imputation tax system, show that dividend policy and fund holdings are related. Relative to market benchmarks and ownership levels across firms, institutional funds are overweight in stocks that pay dividends. Among dividend-paying stocks there is no simple preference for high dividend yields, probably because the highest dividend yields are not sustainable. Instead we find an inverted U relationship between institutional ownership and dividend yield. The tax hypothesis dominates the prudent-man hypothesis in explaining ownership by institutional clienteles. Institutional funds have a higher ownership in stocks which carry full imputation tax credits compared to stocks which have partial, or zero, imputation tax credits.

Dividend Policy and Institutional Holdings: Evidence from Australia

“…However, this result does not hold for the 2nd and 4th size quartile. Hence, our result is inconclusive and somewhat inconsistent with the finding by (Jun et al 2011), who show that Australian firms have no preference on high dividend payout ratio because high dividend yield is not sustainable. Panel C shows the correlation matrix between the variables of interest.…”

“…This finding, in general, is consistent with the (Grinstein and Michaely 2005) study with the U.S. data. This result could be explained by the theory of which a high dividend yield is not stable (Jun et al 2011).…”

“…The coefficients on the dividend yield and the dummy variable for dividend payment are insignificant and negative in our empirical test, meaning that institutional investors probably dislike higher dividend payments or are at least not attracted by a higher dividend yield or whether the firm has a history of dividend payments in the past. This result may be explained by (Jun et al 2011) statement that a high dividend yield is considered non-sustainable by institutional investors. The estimation results from the panel VAR regression and the Granger causality test also show no significant influences between institutional ownership and dividend payout.…”

“…Hence, the Australian tax system provides more tax incentive to domestic and international retail investors, with the Australian stock market also being an ideal opportunity for retail investors. In addition to the findings on the effect of retail shareholders on dividend policy in Australia, (Jun et al 2011) found that institutional investors have put more weight in dividend-paying firms, and firms which have a full imputation tax credit.…”

Payout Policy Tax Clienteles, Ex‐dividend Day Stock Prices and Trading Behavior in Germany: The Case of the 2001 Tax Reform

“…Incentives to form tax‐induced dividend clienteles depend on the degree of differential taxation between dividends and capital gains. Recent research has been supportive of the existence of tax‐induced clienteles in imputation systems in Canada (Elayan et al., ), Australia (Jun et al., ) or the UK (Bell and Jenkinson, ; Lasfer, ), for example, and in the US classical tax system (Blouin et al., ; Whitworth and Rao, ; Zhang et al., ). If tax‐induced dividend clienteles exist in Germany, then this effect should be more pronounced in the pre‐2001 tax reform period but weaken or even disappear with the 2001 tax reform.…”