6. Clientele Effects

We have also seen that different types of investors can have different preferences with respect to how much and how the firm distributes money. For example:

  • Individual shareholders in high income-tax brackets have a preference for stocks with low dividend payouts.
  • In contrast, individuals in low tax brackets could be comparatively more interested in low- to medium-dividend stocks.
  • Tax-free institutions are indifferent when it comes to the tax implications of the payout decisions, and their preferences will most likely be driven by the specific liquidity needs.
  • Corporations or holding structures might favor high-payout stock, at least if dividend exclusion applies.

 

Different payout policies could therefore attract or deter different types of investors. For example, take the case of a family-controlled firm that has multiple family shareholders, some of which work for the firm whereas others solely benefit from regular dividend payments:

  • As the number of shareholders increases over time (for example because multiple kids inherit the shares of the founders), it becomes increasingly difficult to control the firm.
  • At the same time, the external shareholders' hunger for dividends could limit the firm's ability to make the necessary investments.
  • In such a situation, the internal family shareholders could try to stop the firm's dividend payments. This could induce cash-hungry family shareholders to sell their shares (for example in a buyback program), which, in turn, would allow the internal family shareholders to consolidate their controlling stake.