Illiquid Owners and Firm Behavior: Financial and Real Effects of the Personal Wealth Tax on Private Firms

We examine how negative liquidity shocks to households propagate to the firms they own. Our main tool for identification is a tax-driven shock to the household’s personal liquidity that is independent of the firm and of the household’s income and preexisting liquidity. We find that higher wealth tax payments on the personal home of a private firm’s controlling shareholders are associated with higher payments from the firm to the shareholder and with lower cash holdings, investments, sales, and performance in the firm. A one percentage-point increase in the shareholder’s wealth-tax-to-liquidity ratio is on average followed by a half percentage-point increase in the firm’s dividends-to-earnings ratio, a one-third percentage-point decrease in investment, and a half percentage-point decrease in sales growth and profitability. These findings suggest that even strictly personal liquidity shocks to shareholders have causal effects on firm behavior. We find the strongest effects when small and medium-sized firms are controlled by shareholders with relatively low wealth. This result suggests the negative spillover from shareholder illiquidity to firm behavior might be mitigated by increasing the wealth-tax payment threshold rather than excluding corporate assets from the tax base.