Managerial Response to the May 2003 Dividend Tax Cut

Abstract

We survey 328 financial executives to determine the effects of the May 2003 dividend tax cut on corporate payout policy. We find that the tax cut led to initiations and dividend increases at some firms, weakly more so at firms for which retail investors are particularly important. However, financial executives say that the tax rate reduction ranks behind stability of future cash flows and cash holdings (and for firms already paying dividends, taxes also rank behind the historic level of dividends) in a list of factors that affect dividend policy. Tax effects are of roughly the same importance as attracting institutional investors and the availability of profitable investments. We also search press releases and find that the dividend tax cut is only occasionally mentioned as the reason for an initiation, especially from 2004 onward. Overall, the evidence indicates that dividend tax rates are a second-order concern in setting payout policy.