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Tax heterogeneousness

As previously mentioned, dividend taxation can influence payout policy. Indeed, some shareholders, such as pensioners or pension funds, need regular incomes which can influence firms and lead them to regularly pay dividends. This reasoning is in line with a study by Elton and Gruber (1970) (see B.1 section). Nevertheless, some authors like Black and Scholes (1974) or Miller and Scholes (1982), even if they do not question market imperfections, still suggest that it makes sense to avoid paying dividends. By this, they confirm Miller and Modigliani’s (1961) neutrality thesis.

Their argument is the following and is based on the heterogeneity of shareholders which can be made up at the same time with shareholders with high and low taxation rates. For Miller and Modigliani, the first category (shareholders with high taxation) look for low dividends whereas the second (highly taxed and/or whose needs for regular cash is important) will prefer companies paying high dividends. Some partial equilibrium will then appear on the market so that when all groups of shareholders are satisfied, a firm will not be able to increase its value using a new dividend policy.

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