Taxes,transactions costs and the clientele effect of dividends

This paper is an empirical investigation into the extent to which transactions costs and taxes influence individual investors' portfolios. Using actual portfolio and demoraphic data made available by the Individual Investor Research Project at Purdue University, this study finds evidence of a significant dividend clientele effect. Reasonable proxy variables used to measure time preferences and tax rates in part explain the cross sectional variability of investors' portfolio dividend yields. The variables that are most important in influencing the individual's dividend decision are age, and a measure of the investor's differential tax rate on dividends and capital gains.