Shareholder Preferences and Dividend Policy




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    • M. J. Brennan is an Irwin and Goldyne Hearsh Professor of Banking and Finance, University of California, Los Angeles. A. V. Thakor is a Professor of Finance, Indiana University. We are grateful to Arnoud Boot, Phil Dybvig, David Hirshleifer, Alan Kraus, Milt Harris, René Stulz, Sheridan Titman, two anonymous referees, and seminar participants at Duke University, Indiana University, London Business School, Northwestern University, the University of Missouri-Columbia, and the University of British Columbia and the European Finance Association meeting in Stockholm for helpful comments on an earlier draft.


This paper develops a theory of choice among alternative procedures for distributing cash from corporations to shareholders. Despite the preferential tax treatment of capital gains for individual investors, it is shown that a majority of a firm's shareholders may support a dividend payment for small distributions. For larger distributions an open market stock repurchase is likely to be preferred by a majority of shareholders, and for the largest distributions tender offer repurchases dominate.