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Taxes, stock ownership, and payout policy: Evidence from a 2011 tax reform in Japan

Author

Listed:
  • Kazuki Onji

    (Graduate School of Economics, Osaka University,Japan)

  • Masanori Orihara

    (Policy Research Institute, Ministry of Finance,Japan)

Abstract

The 2011 tax reform in Japan changed the definition of the large individual shareholders in the Japanese tax law. As a result of this tax reform, the top marginal tax rate on dividend income for individual investors whose ownership ratios were between 3 and 5% rose from 10 to 43.6%. This tax reform created an incentive for these investors to restrict their ownership stakes to below 3%. We find clear evidence of such ownership adjustments: 51.9% of 3-to-5%-stake investors sold their stocks before the tax hike. The percentage of sellers was 86.1% for those whose ownership ratios were between 3 and 3.1%. We exploit this tax reform to examine whether investors f tax preferences affected firms f payout policy. Individual investors who retained stakes of at or more than 3% after the tax reform had an incentive to encourage firms to pay fewer dividends because dividends were less valuable to them. We predict that firms with such investors would have reduced dividend payout, and find statistical evidence supporting this prediction. Our study provides new quasi-experimental evidence supporting the dividend clientele hypothesis.

Suggested Citation

  • Kazuki Onji & Masanori Orihara, 2016. "Taxes, stock ownership, and payout policy: Evidence from a 2011 tax reform in Japan," Discussion papers ron278, Policy Research Institute, Ministry of Finance Japan.
  • Handle: RePEc:mof:wpaper:ron278
    as

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    File URL: https://warp.ndl.go.jp/info:ndljp/pid/12153332/www.mof.go.jp/pri/research/discussion_paper/ron278.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    large shareholder; payout policy; stock selling; natural experiment;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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