Shareholder Illiquidity and Firm Behavior: Financial and Real Effects of the Personal Wealth Tax in Private Firms

Shareholder Illiquidity and Firm Behavior: Financial and Real Effects of the Personal Wealth Tax in Private Firms

Janis Berzins, Øyvind Bøhren, Bogdan Stacescu

Series number :

Serial Number: 
646/2019

Date posted :

January 02 2020

Last revised :

January 02 2020
SSRN Share

Keywords

  • household finance • 
  • Corporate Finance • 
  • illiquidity • 
  • taxes • 
  • wealth tax • 
  • dividends • 
  • cash holdings • 
  • growth • 
  • performance

We examine how negative liquidity shocks to shareholders propagate to the firm.

Analyzing regulatory changes to personal wealth taxation in Norway, we show that higher taxes on the home of private firms’ controlling shareholders are associated with higher dividend and salary payments from firms to shareholders and lower cash holdings, growth, and performance in firms. A one percentage-point increase in the shareholder’s wealth-tax-to-liquid-assets ratio is on average followed by a half percentage-point increase in the dividends-to-earnings ratio and a half percentage-point decrease in sales growth and profitability. These findings suggest that shareholder illiquidity has causal effects on firm behavior.

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Authors

Real name:
Janis Berzins