Different investor groups have differing tax preferences that create clientele effects in which dividend policy of a firm is optimized for the tax preferences of its investors.

Question

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Different investor groups, such as individual investors or institutional investors, may have different tax preferences in terms of receiving dividends or capital gain. For example, some investors may prefer to receive dividends due to the favorable tax treatment while others may prefer capital gain to defer taxes. Therefore, firms may adjust their dividend policy to attract investors with varying tax preferences, creating clientele effects.

Different Investor Groups Have Differing Tax Preferences That Create Clientele