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Introduction

The main objective of this research is to explore the current research by investigating factors influencing retail investors' preferences on dividends payouts in China. More specifically, the paper will 英国论文网examine the impact of two contradicting factors: tax and agency cost concerns on retail shareholders' preferences.
Dividend policy, as one of the three core components of corporate finance, has been the subject of much research in the last few decades. Generally, the subject was studied from two main research lines: motives for dividend policy and market reaction to dividend policy (Li et al, 2009).
In the last five decades, there has been a sustained academic interest in examining the motives for dividend decisions (Li et al., 2009; Wei and Xiao, 2009; Guo and Ni, 2008). There is a general agreement among researchers that investors' preference is one main determinant and motive for companies' dividends decisions. More specifically, Baker and Wurgler (2004) provided evidence that dividend decision can be interpreted from the perspective of catering theory. That is managers tend to initiate dividends when investors demand for dividend payers increase and tend to omit dividends when investors prefer non-payers.
Shareholders' preferences -as a determinant of dividend policy- and factors influencing their preferences have been investigated from different angles. For instance, some research focused on agency problem and found a relationship between shareholders' legal rights and dividends preference (Jiraporan and Ning, 2006; La Porta et al., 2000). Others focused on other factors such as age, level of income and tax incentives (Graham and Kumar, 2006).
If shareholders' preferences for dividends are explained from agency theory point of view, it is expected that retail investors would prefer cash dividends over stock dividends. That is since retail investors have no control over managers' behaviour and have no information on the profitability of future projects and investments; they prefer to restrict managers' undesired behaviour by reducing the available cash (Li and Huang, 2006).
However, since tax regulations in China differentiate between dividends and capital gains, tax incentives may influence investors' preferences. Cash dividend is subject to 20% tax rate whereas capital gains are tax free in China (Wei and Xiao, 2009). Consequently, if tax was the concern of investors, it is expected that investors would prefer stock dividends over cash dividends. Hence, it is assumed that agency theory and tax are adversely related in terms of their impact on investors’ choice for cash and stock dividends.
Guo and Ni(2008) found that the firms with higher institutional investors are more likely to pay dividends where tax advantage is highly associated with institutional preference for cash dividends. Furthermore, Wei and Xiao (2009) investigated investors’ preferences for cash and stock dividends in China and found that stock dividend is positively associated with the proportion of publicly tradable shares. Tax consideration was among the reasons for this positive relationship (Wei and Xiao, 2009). Graham and Kumar (2006) found that tax is a major concern for young investors and a minor concern for old investors. Investors’ preference was found to be influenced when tax is a major concern.



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