BACKGROUND : The value of equity investments depends to some extent on the tax consequences
for investors. When groups of investors have different tax preferences, this can lead to
conflicting pressures on firms to either retain earnings or pay dividends. The findings of this
study will be of interest to researchers of taxation and corporate governance alike, as they
highlight the role that corporate shareholders play in the decisions of the firm. Investors and
regulators will also be interested in the findings as they reveal more about the interaction
between shareholders with conflicting interests. Lastly, changes in behaviour as a result of
changes in tax legislation are of interest to those with fiscal responsibility.
SETTING : A 2012 dividend tax change in South Africa, which simultaneously altered the tax
preferences of individual and corporate investors, provides a unique opportunity to investigate
firms’ reaction to their investors’ tax preferences.
AIM : This article seeks to determine whether firms respond to changes in their investors’ tax
preferences in their decisions to either retain earnings or pay dividends.
METHOD : The article investigates the responses of firms to the 2012 dividend tax change using
RESULTS : Findings show that firms consider changes in the tax preferences of their investors in
setting dividend policies. In addition, it appears that corporates have greater success in
lobbying for beneficial dividend changes than individuals.
CONCLUSION : Changes in investors’ tax preferences impact on firms’ dividend policy decisions.
These decisions ultimately affect the value of the firm to its investors.