Tax-clientele effect refers to:
ATax authorities setting dividend rates
BTax shield on debt
CEqual tax for all dividends
DInvestors in different tax brackets self-selecting into firms whose dividend policy suits them
Answer & Solution
Correct answer: D. Investors in different tax brackets self-selecting into firms whose dividend policy suits them
1. Different investors have different tax preferences.
2. High-tax investors prefer low-dividend (high-retention) firms; low-tax investors prefer dividends.
3. Firms attract a "clientele" that matches their dividend policy.
_Source: ICAI BoS CA Inter Paper 6A, Ch 8 "Dividend Decisions", §4_