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 firms. 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 with lower cash holdings, investments, sales, 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, a one third percentage-point decrease in investment, and a half percentage-point decrease in sales growth and profitability. These findings suggest that shareholder illiquidity has causal effects on firm behavior.