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Insiders' Tax Preferences and Firms' Choices between Dividends and Share Repurchases

Published online by Cambridge University Press:  06 April 2009

Jim Hsieh  and
Qinghai Wang
Jim Hsieh
Affiliation:
jhsieh@gmu.edu, School of Management, George Mason University, Fairfax, VA 22030
Qinghai Wang
Affiliation:
qinghai.wang@mgt.gatech.edu, College of Management, Georgia Institute of Technology, Atlanta, GA 30308.
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Abstract

This paper investigates whether corporate payout policy is associated with insiders' share holdings and their tax preferences. We find that insider ownership and the implied tax liabilities are positively related to a firm's propensity to employ share repurchases. Firms with higher levels of or greater increases in insider ownership prefer stock repurchases to cash dividends. This relation is more significant in years when dividends were more tax disadvantaged relative to capital gains. Our findings are robust to the endogeneity of insider ownership and the inclusion of various control variables such as firm size, permanence of cash flows, growth opportunities, institutional ownership, and executive stock options. Overall, our results suggest that personal tax considerations from insiders affect corporate payout decisions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 1 , March 2008 , pp. 213 - 244
Copyright
Copyright © School of Business Administration, University of Washington 2008

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