Illiquid Owners and Firm Behavior: Financial and Real Effects of the Personal Wealth Tax on Private Firms

Illiquid Owners and Firm Behavior: Financial and Real Effects of the Personal Wealth Tax on Private Firms

Janis Berzins, Øyvind Bøhren, Bogdan Stacescu

Series number :

Serial Number: 
646/2019

Date posted :

January 02 2020

Last revised :

October 15 2021
SSRN Share

Keywords

  • household finance; corporate finance; illiquidity; taxes; wealth tax; dividends; cash holdings; growth; performance

We examine how negative liquidity shocks to households propagate to the firms they own. Our main tool for identification is a tax-driven shock to the household’s personal liquidity that is independent of the firm and of the household’s income and preexisting liquidity.

We find that higher wealth tax payments on the personal home of a private firm’s controlling shareholders are associated with higher payments from the firm to the shareholder and with lower cash holdings, investments, sales, and performance in the firm. A one percentage-point increase in the shareholder’s wealth-tax-to-liquidity ratio is on average followed by a half percentage-point increase in the firm’s 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 even strictly personal liquidity shocks to shareholders have causal effects on firm behavior. We find the strongest effects when small and medium-sized firms are controlled by shareholders with relatively low wealth. This result suggests the negative spillover from shareholder illiquidity to firm behavior might be mitigated by increasing the wealth-tax payment threshold rather than excluding corporate assets from the tax base.

Authors