Institutional and individual investor preferences for dividends and share repurchases

This study shows that individual investors prefer to invest in high dividend yield stocks and in dividend-paying firms whereas relatively lower-taxed institutional investors tend to prefer low dividend yield stocks and non-paying firms. Consistent with Brennan and Thakor's [Brennan, M. J., & A. V. Thakor. (1990). Shareholder preferences and dividend policy. Journal of Finance, 45, 993–1018] adverse selection model, informationally superior institutional investors are shown to prefer firms that engage in larger share repurchases whereas individual investors do not prefer share repurchases. These results are contrary to the widely held beliefs (a) regarding tax-based and non-tax-based dividend clienteles, (b) that firms pay dividends to encourage monitoring by institutional investors, and (c) that the personal tax rate on equity is low (or zero).