Adding shareholder value through dividend policy : UK evidence on tax-based shareholder clienteles

This paper addresses the question of dividend clienteles based on shareholder-level taxation. In the United Kingdom in 1997, radical changes were made to the way in which the dominant shareholder clientele was taxed on dividend income. These changes provided a unique quasiexperimental opportunity for a direct test of dividend clienteles, and of tax theories. This issue is central to policy formation, and to predicting the likely impact on shareholder value of changes to the dividend policy pursued by firms. Evidence is presented of two distinct tax-based clienteles in the United Kingdom, with contrasting preferences, one of which was strong enough to influence payout in the firms in which this clientele invested. The implication for South African firms is that, as the tax system changes, the payout preference of shareholders may also change. It is imperative that corporate financial managers react to these clienteles, and their requirements.