Blockholder Power, Shareholder Conflicts and Legal Protection: Evidence from Tax Preferences and Payout Decisions

Tax codes regularly create conflicts of interests between small and large shareholders with respect to the payout decision of firms. We use this fact to study (i) whether firm behavior reflects preferences of blockholders and (ii) the effectiveness of minority shareholder protection on blockholders’ power to promote corporate behavior at the expense of minority shareholders. Based on an extensive data set covering 3,944 European firms over the 1999-2008 period, we find that payout behavior strongly reflects tax preferences of a firm’s largest shareholder. However, as minority shareholder protection increases tax preferences of minority shareholders are more likely to be partially reflected in the payout decision. Our results are stable against a battery of robustness tests. This includes endogeneity issues, which may be relevant because of the well-known clientele effect. Thus, our analysis documents that firm behavior (i) is affected by blockholder preferences and (ii) legal minority shareholder protection effectively restricts the power of blockholders in case of conflicting interest among shareholders.