Taxes, earnings payout, and payout channel choice

• How do different tax regimes affect payout levels and relative attractiveness of payout channels?
• This study provides an exhaustive view on tax regimes over the past 25 years in the UK.
• Tax regulation changes affect preferences for dividends and capital gains and explain the choice between dividends and share repurchases.
• There is no evidence that firms adjust their payout decision toward specific tax clienteles.
• Changes of tax parameters for individual investors, pension funds, and corporate investors only have a small impact on aggregate dividends.

We study the tax regulations in relation to dividends and capital gains over the last two decades for the UK in order to determine whether changes in tax regimes affect corporate payout policy (dividends, share repurchases, or a combination). While we can identify investors’ tax-driven preferences for a specific payout channel, we find no evidence of tax-induced clienteles. Firms do indeed not cater to the tax preferences of their shareholders (including individuals, pension funds, corporations). Other factors, such as equity-based compensation received by the CEO and investor sentiment in the form of optimism reduce the dividend payout and increase the use of share repurchases.