Dividend policy, corporate control and the tax status of the controlling shareholder


This paper studies the impact of the concentration of control, the type of controlling shareholder and the dividend tax preference of the controlling shareholder on dividend policy for a panel of 220 German firms over 1984–2005. In line with the agency model, we find a negative relation between family control and dividend payouts at low and high levels of control. We also find evidence of reduced speed of adjustment of dividends at intermediate levels of family control. We further document that corporate control is associated with higher dividend payouts if an industrial or commercial corporation is the majority shareholder of the company. Finally, the results do not provide evidence that the tax preference of the largest shareholder matters for dividend payout decisions.

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Fig. 1


  1. 1.

    We are grateful to an anonymous referee for pointing this out.

  2. 2.

    The ‘solidarity surcharge’ (‘Solidaritätszuschlag’) is a surcharge on corporate and personal earnings and was introduced in order to meet the costs of the German reunification. The surcharge is currently 5.5%.

  3. 3.

    Thirty-six firms leave the stock market and go private, sixteen go bankrupt, thirty-eight are taken over and twelve put in place a ‘control agreement’ during the period of analysis.

  4. 4.

    The name Saling Aktienführer changed to Hoppenstedt Aktienführer in 1997 with the publication of the 90th edition of the guide.

  5. 5.

    Hence, the weighted average dividend per share is calculated as follows. Let NT be the total number of shares outstanding, No the number of ordinary shares, and Np the number of preference shares. Thus, NT = No + Np. Moreover, let DPSo be the dividend per share paid on ordinary shares, and DPSp the dividend per share paid on preference shares. The weighted average dividend per share (WDPS) is then equal to WDPS = (DPSoxNo + DPSpxNp)/NT.

  6. 6.

    We reestimate all the regressions in this paper including special dividends. The results are much weaker. One way of interpreting this is that these special dividends are noise rather than a permanent shift in dividend policy. The crucial question that comes to mind is what happens after the special dividend. Does the firm revert to the dividend payout it paid in the year(s) before the special dividend or does it stick to the new dividend level? To analyse the payout behaviour after the special dividend has been paid, we calculate the difference between the dividend per share (excluding the special dividend) paid in t0 and that paid in t + 1 as well as the difference between t − 1 and t0 as a difference-in-differences-type estimate of the impact of the special dividends. We then perform a t test for the difference in the two differences. It turns out that there is no significant difference in differences. Hence, the results suggest that special dividends do not consist of a permanent shift in dividend policy.

  7. 7.

    Both agreements require the approval of at least 75% of the voting capital represented at the annual general meetings of both the controlling company and the subsidiary. Note that the existence of a controlling shareholder does not necessarily imply the existence of either a PLA or SMA.

  8. 8.

    Behm and Zimmermann (1993) use ‘net profits’, a figure that is suggested by the German Financial Analysts Association (DFA). However, data on net profits are not available for all firms in our sample and, in any case, the figure is only reported if it is not negative.

  9. 9.

    See e.g. Boehmer (2002), Becht and Boehmer (2001) and Franks and Mayer (2001). Franks et al. (2012) report such complex control structures not only in Germany, but also France and Italy.

  10. 10.

    As mentioned above, we exclude firms that are controlled by foreign investors from the regression analysis since it is not possible to determine the tax status for each foreign investor in our sample firms.

  11. 11.

    Tables 4 and 5 focus on a smaller range of types of large shareholder than Table 3 given that there are too few observations for the omitted types of large shareholder.

  12. 12.

    For those firms that have more than two changes in control, none of the changes in control after the second one renders the minimum of 2 years of data after the change. Hence, these changes have been excluded from Table 5.

  13. 13.

    If V(i,t) is iid.

  14. 14.

    The basic idea of the generalized method of moments (GMM) is to find parameter estimates for which theoretical moment conditions (for example, the orthogonality of instruments to the error terms) also hold for empirical data. If there are more moment conditions than parameters to be estimated, all moment conditions will not be exactly satisfied at the same time. Hence the difference between the observed and the expected moments is minimized.

  15. 15.

    In unreported regressions, we interacted the tax preference variable with (i) the interaction between control (for each of the three types of large shareholders) and cash flow and (ii) the interaction between control (for each of the three types of large shareholders) and the lagged dividend. This enabled us to identify a possible differential effect of the tax preference of the large shareholder on the target dividend payout and the speed of adjustment towards the target dividend payout. We did not find that either three-way interaction term had a significant coefficient.

  16. 16.

    The tax system changed again in 2009.

  17. 17.

    The withholding tax of 25% may be reduced by German double taxation treaties with other countries.


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Correspondence to André Betzer.



Under the imputation system (until 2000), a gross dividend of Deutsch Mark (DM) 1 (including the tax credit received for corporate tax (plus the ‘solidarity surcharge’) on distributed earnings) was worth (1 − ts) − tstss to an individual shareholder, where ts stands for the shareholder’s income tax rate and tss for the ‘solidarity surcharge’. The tax discrimination variable (for the period prior to 2001), measuring the preference of dividends over capital gains, is equal to:

$${\text{TAX}} = \frac{{\left( {1 - t_{s} } \right) - t_{s} t_{ss} }}{{\left( {\left( {1 - t_{r} } \right) - t_{r} t_{ss} } \right)\left( {\left( {1 - t_{g} } \right) - t_{g} t_{ss} } \right)}}$$

where tr stands for the corporate tax on retained earnings, and tg for the capital gains tax rate. A shareholder has a preference for dividends over capital gains if the tax discrimination variable TAX exceeds 1.

  1. (i)

    Individuals. The top tax rate on personal income (i.e., ts) in Germany varies from 48.5% to 56% during 1977 and 2005 (see Table 1). There is no personal capital gains tax (i.e., tg = 0) provided that shares are held for a minimum period (i.e., 6 months until 1998, and 12 months thereafter). For shares held for less than the minimum period, the realized capital gains are added to an individual’s taxable income. If we assume that the shares are held for at least 1 year, the tax discrimination variable reduces to:

    $${\text{TAX}} = \frac{{\left( {1 - t_{s} } \right) - t_{s} t_{ss} }}{{\left( {\left( {1 - t_{r} } \right) - t_{r} t_{ss} } \right)}}.$$

Thus, the tax preference for dividends compared to capital gains depends on the marginal income tax bracket of the shareholder. Under the imputation system (i.e. before 2001), we need to consider two categories of individuals:

  1. (a)

    Individuals whose marginal income tax rate is lower than the corporate tax rate on retained earnings and capital gains are not realized within 6 months (12 months after 1998). This type of investor prefers dividends over capital gains.

  2. (b)

    Individuals whose marginal income tax rate is above the corporate tax rate on retained earnings have a tax preference for long-term capital gains.

Under the new half-income system (from 2001 onwards), one half of the dividend is taxed at 26.4% as in previous years, and the other half is now taxed twice, at the personal and corporate level. Therefore, for individuals the effective tax rate exceeds the tax rate of 26.4% incurred on retained earnings (see Table 1). Since capital gains are still tax-exempt (on stock held for more than 12 months), individuals prefer capital gains over dividends even if they are in the lowest tax bracket.Footnote 16 The tax discrimination variable for individuals is now as follows:

$${\text{TAX}} = \frac{{\left( {1 - t_{d} } \right) - t_{d} t_{ss} - \left( {\left( {1 - t_{d} } \right) - t_{d} t_{ss} } \right) 0.5t_{s} \left( {1 + t_{ss} } \right)}}{{\left( {1 - t_{r} } \right) - t_{r} t_{ss} }}.$$

As controlling shareholders are wealthy individuals, their annual taxable income will most likely exceed DM 102,000 (the threshold in place for being taxed at the highest income tax rate at the end of our sample period). Consequently, domestic individuals are assumed to be taxed at the highest income tax rate (for details see Table 1). Furthermore, we assume that individuals hold their large share stakes for a long period of time (at least 12 months) such that capital gains tax, tg, is zero. Plugging these values into Eqs. (9) and (10), we obtain that the tax discrimination variable (TAX) for this type of investor is always below 1. Hence, individuals prefer long-term capital gains over dividends.

  1. (ii)

    Corporations. Before 2001, corporate investors (similar to individuals) received the dividend plus a credit which amounted to their corporate tax liability. Consequently, when receiving the dividend, they did not pay any tax. However, the dividend received increased their taxable income. Under the new system, dividend payments to corporations were tax-free until 2004. However, since 2004, 5% of the dividend payment have had to be declared as revenue and have therefore been subject to corporate tax. Since capital gains from the sale of shares held in another company are also tax-exempt under the new system, corporations are indifferent between retained and distributed earnings between 2001 and 2004 with a slight preference for capital gains thereafter.

In order to obtain the income tax rate ts for corporations, we need to make an assumption on how profits in these (parent) firms are distributed. If all profits are distributed as dividends by the corporate shareholder, the tax rate on distributed earnings applies. In contrast, if all profits are retained, the corporation tax on retained earnings, tr, is applicable (see Table 1 for details). We assume that the average firm has a dividend payout ratio of 70% (with published earnings as reference), roughly equal to the percentage of published earnings that German firms pay out as gross dividends (see Andres et al. 2009). Based on this assumption, the effective (weighted average) corporate tax rate for a firm is 42% during the period up to 1989 [36% (70%) + 56% (30%)]. Plugging these values into Eq. (8), we obtain a tax discrimination variable for corporations that is always larger than 1 for the period 1984–2000. Thus, corporations have a strong tax preference for dividends during that period. From 2001 onwards, corporations are indifferent between capital gains and dividends.

  1. (iii)

    Foreign investors. As this type of investor is not entitled to a tax credit by the German fiscal authorities, it may be subject to double taxation which includes corporate tax on the earnings of the German firm and withholding tax on dividends as well as income tax in the investor’s home country.Footnote 17 Hence, the tax discrimination variable for foreign investors is:

    $${\text{TAX}} = \frac{{\left( {\left( {1 - t_{d} } \right) - t_{d} t_{ss} } \right)\left( {1 - t_{sf} } \right)}}{{\left( {\left( {1 - t_{r} } \right) - t_{r} t_{ss} } \right)\left( {1 - t_{gf} } \right)}}$$

    where tgf (tsf) stands for the tax rate on capital gains (income) in the foreign investor’s home country and td stands for the corporate tax on distributed earnings. Thus, the preference depends on the tax treatment by the investor’s home country as well as the existence of double taxation treaties. As it is not feasible to determine the tax status of each foreign investor in our sample firms, we ignore firm-year observations relating to control by foreign investors in our regression analysis.

  2. (iv)

    Widely held firms. As we do not have information on the individual shareholders of these firms, we use a weighted average tax discrimination variable. The aggregate weights are based on German surveys on share ownership (‘Gesamtwirtschaftliche Finanzierungsrechnung Deutsche Bundesbank’) and relate to the importance of various types of shareholder in the average listed German firm. For example in 1990, 17% of all the shares listed on the German stock exchanges were owned by individuals, 69% by companies, and 14% by foreign investors. We assume that the tax discrimination variable for foreign investors is 1 and the tax discrimination variables for corporations, local and federal government authorities, banks, and insurers is 2.0. Given that the tax discrimination variable for individuals is 0.94 in 1990 [all computations are based on equation (8)], the weighted average tax discrimination variable for widely held firms amounts to 1.68 (17% × 0.94 + 69% × 2.0 + 14% × 1).

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Andres, C., Betzer, A., van den Bongard, I. et al. Dividend policy, corporate control and the tax status of the controlling shareholder. J. Ind. Bus. Econ. 46, 157–189 (2019). https://doi.org/10.1007/s40812-018-0100-6

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  • Dividend policy
  • Payout policy
  • Lintner dividend model
  • Tax clientele effects
  • Corporate governance

JEL Classification

  • G32
  • G35