Effect of the Tax Differential on Dividend Clientele
Theory suggests several possible reasons for these positive abnormal returns, these include: reduction of free cash flow or debt capacity, signaling of management's optimism, distribution of tax preferred income, and dividend clientele
Therefore, a test which does not account for the systematic changes in differential dividend preferences across beta levels is less likely to identify the tax-induced dividend clientele
Any dividend clientele
effect among institutional investors is weaker now than it was before the PI standard emerged in the early 1990s.
These results are contrary to the tax-based dividend clientele
Schlarhaum, 1978, "Some Direct Evidence on the Dividend Clientele
Phenomenon," Journal of Finance 33(5), 1385-1399.
These results sharply contrast with the dividend clientele
hypothesis, which predicts that the actions of long-term investors in high tax brackets will result in the smallest dividend (yielding) stocks having the largest abnormal returns.
Information Content of Dividend Changes: Cash Flow Signalling, Overinvestment, and Dividend Clienteles
Vijh, 1990, Dividend Clienteles
and the Information Content of Dividend Changes, Journal of Financial Economics, 26: 193-219.
However, Bajaj and Vijh (1990) present evidence that dividend clienteles
account for the market reaction to dividend changes.
Ang, Blackwell and Megginson |3^; Elton and Gruber |12^; and Poterba and Summers |31^ among others, report results supporting the existence of tax-induced dividend clienteles
Elton and Gruber proposed that, in equilibrium, investors might sort themselves into tax-induced dividend clienteles
, such that high-tax investors hold low-yield securities and vice-versa.