Determinants of Institutional Ownership: Implications for Dividend Clienteles

Abstract

This paper investigates whether the tax disadvantage of dividends results in a relation between institutional portfolio allocations and dividend yield. I analyze the holdings of tax-exempt and taxable institutional investors. Controlling for size, performance, and risk, I find that taxable institutional owners prefer low yield stocks while tax-exempt investors do not exhibit a preference for either high or low yield securities. In addition, I find that the magnitude of the stock price reaction to the announcement of a dividend change is negatively related to the ownership level of taxable institutional investors. This evidence is consistent with the hypothesis that firms with greater taxable investor ownership have smaller price reactions to dividend changes because the information in the dividend change is offset by an increase or decrease in dividend yield. These findings are broadly consistent with the existence of tax-induced dividend clienteles.