The relationship between investor tax preferences and the payout methods of JSE listed companies

Abstract

Background: Investor tax preference parameters have been included as an explanatory variable for changes in payout methods in developed countries. There is, however, a lack of research in this area in developing countries. Tax reform in South Africa – comprising a change in the tax regime and successive increases in tax rates – offers a unique setting to examine investor tax preference parameters as a contribution to literature.

Aim: This study investigated the relationship between investor tax preference parameters (of individuals, corporates, and institutions) and payout methods (namely dividends, capital distributions, additional shares, and share repurchases).

Setting: The study used data collected in respect of companies listed on the Johannesburg Stock Exchange (JSE) in South Africa for the financial reporting periods ranging from 2012 to 2019.

Method: A regression analysis of panel data was employed to relate the changes in payout methods to changes in profits, investor tax preference parameters, the lagged levels of variables, and ownership concentration dummy variables.

Findings: The empirical evidence of this study revealed that investor tax preferences affected dividends as a payout method. This accordingly suggests that the tax differential of dividends and capital gains affect the supply of dividends in South Africa.

Conclusion: The study contributes empirical evidence in support of the taxes and tax clienteles theory from a developing country perspective. This could suggest that tax reform in a developing country, in this case, South Africa, has a more pronounced effect on payout methods than in developed countries.