DOI 10.1007/s11573-012-0599-3Z Betriebswirtsch (2012) 82:115–122

Zf B-SPECIAL ISSUE 5/2012

Does insider shareholding matter to corporatepayout reactions to tax reforms?

Caren Sureth

Abstract: Theory indicates that since Germany’s 2001 Tax Reform Act non-qualified shareholdershave strongly preferred share repurchases over dividends, even though qualified or corporate share-holders are typically expected to be indifferent between the two. By contrast, prior to the reformmost shareholders preferred dividends. As payout policies may be driven by taxes but also by fac-tors arising from asymmetric information of agents and principals, this raises the question whetherpayout decisions are driven by ownership structure, i.e., members of the management board or otherinfluential shareholders such as blockholders. Kaserer et al. (Z Betriebswirtschaft 82, 2012) investi-gate the impact of insider shareholding on payout policy. Their study sheds light on the mechanismsbehind corporate payout policies and provides important new insights into the influence that insiders’actions have on payout policies. The authors leave issues like the impact of voting power and ofdominant shareholder groups more or less untreated, hence preparing the floor for a whole series ofinteresting future empirical studies.

Keywords: Insider shareholding · Ownership structure · Dividend policy · Share repurchases ·Tax reform

JEL Classification: G32 · G35 · H25

© Gabler-Verlag 2012

Prof. Dr. C. Sureth (�)Department for Taxation, Accounting and Finance, University of Paderborn,Warburger Str. 100, 33098 Paderborn, Germanye-mail: csureth@notes.upb.de

116 C. Sureth

1 Motivation, relevance and research gap

The German Tax Reform Act 2001 (GTRA) introduced a major tax reform that abolishedthe full imputation system of corporate income tax and introduced a shareholder reliefsystem, the so-called half-income system, for individual shareholders. Since the reform,profits have been subject to a corporate tax that cannot be credited against shareholders’personal income tax on dividends and hence cannot be refunded. Under shareholder relief,half of the dividends are exempted from shareholders’ individual income tax. As capitalgains often are tax-exempted for non-qualified shareholders, owners strongly preferredshare repurchases over dividends. Qualified or corporate shareholders are typically indif-ferent between the two payout channels. By contrast, under the full imputation systemmost shareholders preferred dividends over share repurchases as dividends enjoyed a taxcredit that avoided double taxation of distributed corporate profits.

The existence of definitive corporate and additional taxation on the individual share-holder level on distributed earnings after the GTRA led firms to adjust their distributionpolicies. A so-called lock-in effect, i.e., an incentive to retain earnings triggered by capitalgains taxation in a non-integrated corporate-income tax system, could be observed.1

Several studies,2 e.g., on the U.S. tax system, indicate that under such tax systemspayout policies are very sensitive to tax reforms. However, in contrast to the 2003 dividendtax cut in the United States, which affected all types of domestic taxable investors in thesame way, under the GTRA different groups of investor are affected differently by taxation.Obviously, since the GTRA the degree of multiple taxation of profits on the corporateand the individual level has differed depending on whether the company has dispersedshareholders, private qualified shareholders, or corporate or institutional blockholders.The GTRA can be regarded as a natural experiment for studying tax effects on the payoutpolicies of corporations in general, depending on the type of shareholders involved.

As payout policies may be driven by taxes but also by factors arising from asymmetricinformation of agents and principals, this raises the question whether payout decisions aredriven by members of the management board (corporate insiders = agents) or by other influ-ential shareholders (blockholders who are not management board members = principals).In this respect, it is possible that corporations with insider shareholdings take other distri-bution decisions than companies with dispersed or qualified shareholders, i.e., they reactdifferently to the tax reform.

Against this background Kaserer et al. (2012) empirically scrutinize

1. how the GTRA affects the ratio of dividends to profits (payout ratio);2. how the GTRA affects the relationship between dividends and share repurchases (pay-

out channel);3. whether the type of shareholder (dispersed shareholders, substantial private sharehold-

ings of at least 5 %, corporate shareholders, institutional shareholders, members of themanagement board, other blockholders = principals) impacts the payout policy; and

4. whether payout behavior changes if management board members hold shares, i.e., ifthey are insiders (= agents).

These research questions are based on some well-known theories. First, the tax perspec-tive which indicates that higher taxes lead to a reduction in dividend payments. Second,

Does insider shareholding matter to corporate payout reactions . . . 117

the incomplete contract perspective, where dispersed shareholders are expected to pre-fer increased dividend payments to compensate influential shareholders (principals) fortheir monitoring activities (monitoring hypothesis). Also, dividend decisions are likelydriven by the tax wedge between institutional and individual shareholders.3 Third, accord-ing to the asymmetric information perspective, insiders (agents) tend to be interested inhigh-dividend payments because these send a positive profitability signal to the market(influential agent perspective).4

There are several studies that seek to figure out what drives corporate payout policies.Recently, two empirical studies on the GTRA have been performed that investigate possibledrivers of payout decisions and contribute to this body of literature,5 but which abstractfrom some relevant details in corporate ownership structure. Against this background theempirical study by Kaserer, Rapp, and Trinchera is a substantial contribution to the existingliterature since it scrutinizes the above questions.

2 Model, hypotheses and main results

Using a large panel data set of listed German firms the authors test three hypotheses:

H1: The GTRA 2001 leads to a declining (increasing) propensity to pay cash dividends(make share repurchases) as well as to lower dividend payout ratios (higher sharerepurchase ratios).

H2: The GTRA 2001 leads to an increasing (declining) propensity to pay cash dividends(make share repurchases) in those firms where members of the management boardhold qualified stakes relative to those firms where they do not.

H3: The GTRA 2001 leads to an increasing (declining) propensity to pay cash dividends(make share repurchases) in those firms where significant institutional shareholdingsare present relative to those firms where they are not.

They find a significant impact of the underlying tax reform on payout policies. Their studyshows a decrease in the propensity to pay out dividends after the GTRA. In particular, in thecase of dispersed shareholdings dividend payments are reduced significantly. There is anobvious tax-induced shift in the preference of dispersed shareholders for share repurchases,whereas most qualified shareholders are more or less indifferent towards alternative payoutchannels. Nevertheless, there are a number of other reasons why corporate and institutionalshareholders favor dividend payments.

The empirical study provides strong support for hypothesis H1. The decrease in divi-dend payouts is almost entirely due to companies where the members of the managementboard do not hold substantial stakes. This result is in line with the theoretical findings ofthe tax perspective, since capital gains of private (non-qualified) shareholders are typicallytax-exempt under shareholder relief. Kaserer, Rapp, and Trinchera find that both the payoutratio and the probability of increasing dividends significantly decrease, i.e., that payoutbehavior is mainly driven by the tax wedge between dividends and share repurchases fornon-qualified private investors.

By contrast, this reduction in payout cannot be observed when insiders, i.e., members ofthe management board, hold a substantial stake. Firms with substantial insider ownership

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seem to have a relatively higher propensity to distribute profits to their shareholders,whereas the payout policies of companies with substantial shares of other shareholdergroups do not respond to the tax reform. Obviously, in those cases where members of themanagement board hold substantial stakes, dividend policies are significantly driven byinfluential agents aiming to maximize the after-tax cash flow through dividend payouts andto send positive signals to the capital market. As there are restrictions on share repurchasesby insiders, it is even more likely that dividend payouts will decrease to a lesser degreeafter the introduction of the half-income system for firms with insider shareholdings thanfirms without such owners. The empirical findings provide strong evidence for hypothesisH2. Further, the ownership effect of insiders is almost entirely balanced by the effectcaptured by the reform dummy. Thus, the overall decrease in dividends is mainly drivenby companies that do not have management blockholders among their shareholders.

The study does not provide evidence for the monitoring hypothesis given in H3. Div-idend payments do not seem to be higher for companies with qualified institutional andcorporate shareholders (principals), neither in the cross-section, nor in the time-series. Ob-viously the agency conflict that influential shareholders face does not lead to an increasein the propensity to pay dividends. Only in case of insider blockholders (agents) can arelatively higher propensity to pay dividends be observed.

3 Discussion and possible extensions

The paper addresses an innovative research question that so far has not received a great dealof attention in financial economics and tax literature. The authors test three hypotheses onthe impact of the GTRA on payout policies and the role of insiders and other influentialshareholders on dividend distribution using a large panel data set with data from varioussources.

3.1 Data

The authors use data from several sources.Accounting data came from Worldscope, capitalmarket data was drawn from datastream, and information on the ownership structure wasextracted from AMADEUS, Hoppenstedt Aktienführer, Commerzbank: Wer gehört zuwem, and the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienst-leistungsaufsicht).

It would be interesting for future research to learn more about how the data was merged,e.g., how ownership information from the Commerzbank data dataset was completed byinformation from other sources. While the Commerzbank data is updated every 6 months,Hoppenstedt provides data on a daily basis. As this data is not panel data, it would beinteresting to run a robustness check with a balanced panel or a panel controlling for sur-vivorship bias to find out to what extent the results are driven by firm structure differencesbetween the years.

In contrast to other studies6 the authors exclude data on financial institutions fromtheir sample, which is in line with a vast body of empirical studies in financial economics,as Kaserer, Rapp, and Trinchera outline. Nevertheless, there are arguments in favor of

Does insider shareholding matter to corporate payout reactions . . . 119

including the financial sector in the sample as they are substantial dividend payers andtheir differences in capital structure and other regulations that are well-known to affectpayout behavior may not impact the relationship between dividends and share repurchases.That said, it would be interesting to examine whether this difference in sample compositioncauses the differences in results.

In the time-series we observe that during the stock market boom beginning 1998 thenumber of small firms with relatively high technological risks increased. After the internetbubble burst the structure of firms listed on the stock exchange changed again as a consid-erable number of smaller firms disappeared off the market. Here, it is important to know towhat extent dividend policies and their sensitivity towards taxes and ownership structuresreflect these structural changes. To control for these structural aspects, the authors reesti-mate their Logit model for the pre-reform period, use the estimated regression coefficientsto forecast the propensity to increase dividends post-reform, and compare these resultswith those from direct observation. This test further supports the result that there is robustevidence that taxes have an impact on payout policies and that insider ownership plays animportant role in this context.

The endogenous variables are cash dividends and share repurchases that refer to com-mon and preferred shares.As the voting rights differ between common and preferred stock-holders it would be worthwhile for future research to address this aspect more closely. Dothe results change if the sample were split between firms with only common stocks andthose with both common and preferred stocks? How big is the impact of the voting powerof the underlying shareholder groups? In this respect it would be interesting to learn moreabout how the authors determined firms with blockholders in case of mixed common andpreferred shares. Did the data allow them to distinguish between blockholders with andwithout voting power? It would be worthwhile to learn more about the structure of thesample in this respect to be able to assess the importance of the difference between thetwo.

3.2 Taxes

The authors mention several other German tax reforms that took place in the underlyingten-year period from 1996 to 2006. They report on the lowering of the threshold forqualified shareholdings from 25 to 10 % in 1999 and then again to 1 % in 2000. Althoughthey scrutinize the role of external influential shareholders they abstract from this taxeffect in their analysis. It may be worthwhile for a new research project to shed more lighton this issue and run an extra robustness check on whether these reforms had an impacton dividend and share repurchase behavior or not. Lowering the threshold for qualifiedshareholdings for tax purposes from 10 to 1 % in 2000 may have pushed shareholders tosell their shares before the stricter rules came into force. It may be interesting to figure outto what extent this effect is reflected in the data. For now, these effects are captured in theyear dummies. It may be useful to explore whether the definition of “blockholder”, heredefined as those holding 5 % of voting rights, may be in conflict with the change in thedefinition of “shareholder with a substantial interest” in the tax system. This aspect shouldbe controlled for, and/or more arguments provided as to why this aspect can be neglected.

120 C. Sureth

Similarly, capital gains were reformed in Germany in 1998 by the introduction of apreferential tax rate for individual shareholders, an extension to the speculation periodfrom 6 months to 1 year in 1999, and some further amendments. As changes in capitalgains taxation may cause double taxation and are well-known to have an impact on assetpricing,7 in future research this issue should be controlled for.

3.3 Further robustness checks

The authors control for several issues. E.g., they reestimate the regression, test their hy-potheses with respect to share repurchases, and also control for effects that arise fromthe transition rules that were implemented when the half-income system was introduced.8

Furthermore, the authors control for the change in institutional rules for share repurchases.They find that their results are robust in both respects.

The analysis on the impact of different groups of shareholders is very interesting. Thestudy provides several intriguing results, some of which contradict existing studies andextend the literature considerably. Nevertheless, there seems to be even more researchpotential in this topic. E.g., it would be interesting to highlight the impact of dominantshareholder groups. Here, the authors distinguish between management, individual, corpo-rate, institutional and other blockholders. It is unclear to what extent the results are drivenby the respective dominant group. E.g., let us assume a company with a dummy variableMB_BH_DUM for management blockholders indicating a substantial share of manage-ment board members. There are also other blockholders, i.e. corporate and institutionalblockholders, that hold shares in the same company. This corporation’s overall ownershipstructure could be 5 % management blockholders, 50 % institutional blockholders and25 % corporate blockholders plus other (dispersed) shareholders. Does the dominance ofthe institutional blockholders change the results of the study? In corporations that have(only a small number of) management blockholders, is the (mainly) tax-driven decreasein dividends as a reaction to the GTRA still balanced by the fact that insiders maximizethe payout? Or would other groups overcompensate for the impact of insiders’ actions?

4 Conclusion

To summarize, studies like the present paper by Kaserer, Rapp, and Trinchera on the impactof ownership structure and taxes on dividend policy shed light on the mechanisms behindcorporate payout policies. They help to complete the dividend puzzle.9 The underlyinganalysis is well conducted and the paper very well written. Kaserer, Rapp, and Trincheracontribute significantly to the dividend puzzle. Specifically, they provide important newinsights into the influence that insiders’ actions have on payout policies. That said, thereis plenty of opportunity for further research and thus it is necessary to conduct furtherempirical studies to validate the hypotheses and carefully cross-check what causes thedifferences between the results at hand and those of other studies.

Acknowledgements: I am indebted to Prof. Dr. Jens Müller for valuable discussions on the under-lying paper. The usual disclaimer applies.

Does insider shareholding matter to corporate payout reactions . . . 121

Endnotes

1 The lock-in effect of capital gains taxation has been described in, e.g., Holt and Shelton (1961);Auerbach (1992); Klein (1999); König and Wosnitza (2000); Sureth and Langeleh (2007); Nie-mann and Sureth (2009); and Niemann and Sureth (2012) and intensely empirically investigated,e.g., recently by Dai et al. (2008); Daunfeldt et al. (2010); Jacob and Jacob (2012) and Schanzand Theßeling (2011).

2 For a review of studies on payout policy in Germany see Hundsdoerfer et al. (2008), pp. 93–95.For the U.S. see, e.g., Allen and Michaely (2003); Poterba (2004); Graham (2008); Kalay andLemmon (2008) and DeAngelo et al. (2008).

3 See Allen et al. (2000).

4 See Chetty and Saez (2005); Brown et al. (2007). See also, e.g., Perez-Gonzalez (2002) andKorkeamaki et al. (2010).

5 See Jacob and Jacob (2012), who find robust evidence of tax-induced dividend discriminationthat corresponds with firms’ propensity to decrease dividends. Further, the empirical study bySchanz and Theßeling (2011), e.g., provides support for the hypothesis that the GTRA led tosignificant dividend cuts. For an empirical study on dividend and share repurchase behavior aftera reform in Switzerland, see Schanz et al. (2010).

6 See, e.g., Schanz and Theßeling (2011), who include financial institutions in their sample.

7 See, e.g., Cook and O’Hare (1992); Burman and Randolphs (1994); Landsman and Shackelford(1995); Lang and Shackelford (2000); Shackelford (2000); Liang et al. (2002); Ayers et al.(2003); Blouin et al. (2003); Akindayomi and Warsame (2007) and Dai et al. (2008).

8 For an analytical model on the impact of this tax reform during the transition period see Sureth(2006).

9 See Black (1976), p. 8.

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