there are several theory about divident policy: one is tax preference theory, another is clientele effect. what is the difference between two? Thanks.
clientele effect says that the dividend policy does not matter because whatever the policy the firm chooses to pursue, there will be clientele or shareholders that would buy the stock. for example, if Citigroup decides to do the residual dividend approach, the investors that want that policy will buy citi stock. if citigroup decides to have no dividend policy, the citi stock will appeal to ppl who want to see 100% of the stock plowed back nito the firm. thus, whatever the dividend polciy, someone will be pleased. tax preference theory states that the buyers of stock choose the stock based on the buyer of the stocks marginal tax rate.
^ tax-preference theory, another explanation: investors prefer companies that retain earnings and thus provide returns in the form of lower-taxed capital gains rather than higher-taxed dividends.
re: tax preference theory… just think of two investors, one at the highest marginal tax rate, and another at the lowest… out of the two, the richer one will PREFER a company that doesn’t pay dividends, since they can CONTROL the timing of their cap gain (only paid once the stock is sold)… whereas, if they receive a dividend (at the discretion of the company) they MUST pay tax on it during that year… clientele is slightly different reasoning… some investors prefer stocks that provide steady income (dividends)…so its for reasons other than tax i guess
bluey is right not everybody preferres capital gains some prefer dividends(low tax brackets) clientele theory is for me almost as market segmentation for yield curves . for different stocks there will be a different type of investor. a change in policy would lead to a change in clientele
I thought theory: dividend preferece is determined by the tax braket, is clientele theory… florinpop Wrote: ------------------------------------------------------- > bluey is right not everybody preferres capital > gains some prefer dividends(low tax brackets) > clientele theory is for me almost as market > segmentation for yield curves . for different > stocks there will be a different type of investor. > a change in policy would lead to a change in > clientele
Tax preference theory: In US (atleast till Dems aren’t in the white house) Dividends are taxed at lower rate (around 15%) for the investor, but the effective tax rate on the dividend is much higher. Lets say a corp is in 35% marginal tax bracket, the effective tax rate on the dividend is [44.75% = 1- (1-35%)(1-15%)]. The taxes on dividend have to be paid out in the year they are received, even if the investor reinvests them right away. Capital gain taxes can be effectively deffered for a long time. So some might not like to get dividends.
hw tax preference refers to the pref form of dividends clientele theory refers to the dividend policy - amount, growth in dividends, maybe form too there is a slight difference
dividend clientele effect states that high tax bracket investors (like individuals) prefer low dividend payouts and low tax bracket investors (liek corporations and pensin funds) prefer hig dividends payouts. is this statement true? but it dose not belong to tax preference theory? confused. I remember in corporate finance, they talk sth like tax clientele, make the ling so vague between tax preference theory and dividend clientele effect. how do you think? Thanks. delhirocks Wrote: ------------------------------------------------------- > Tax preference theory: > > In US (atleast till Dems aren’t in the white > house) Dividends are taxed at lower rate (around > 15%) for the investor, but the effective tax rate > on the dividend is much higher. Lets say a corp is > in 35% marginal tax bracket, the effective tax > rate on the dividend is [44.75% = 1- > (1-35%)(1-15%)]. The taxes on dividend have to be > paid out in the year they are received, even if > the investor reinvests them right away. > > Capital gain taxes can be effectively deffered for > a long time. > > So some might not like to get dividends.