Stock ownership bunching

Under the Japanese tax system, individual investors whose ownership stakes are at or above a statutory threshold face over 30 percentage points higher dividend tax rates relative to those below the threshold. The April 2003 dividend tax reform created a sharp tax differential across a threshold of 5% ownership share while the October 2011 tax reform reduced the threshold to 3%. We hypothesize that these tax reforms induced individual shareholders to restrict their ownership stakes to levels below these thresholds, and test this hypothesis using an investor-level panel dataset. We find that half of the affected individual shareholders sold stocks to restrict ownership stake, but one-third of these stock sales were nominal in a sense that these transactions took place between shareholders and their personal asset management companies. Our study suggests that dividend taxes may not affect the substance of corporate ownerships at large if tax avoidance strategies are available.