Tax Driven One-Time Dividends and the Managerial Discretion Hypothesis - New Evidence from Germany

Abstract

There is an ongoing debate in the literature whether the positive stock price effects to the announcement of a dividend increase or a share repurchase should be explained by the information-signalling hypothesis or the managerial discretion hypothesis of by both of them. We propose a new study where the relevance of the managerial discretion hypothesis in explaining stock market reactions to pay-out announcements could be directly tested. For that purpose we analyse the announcement effects of one-time dividend payments by listed German companies. These dividends were paid in order to realise a tax saving opportunity for the shareholders caused by a revision of the German tax code. As the firms did no have much discretion in timing the disbursement, the event by itself should not have any informational impact. It will be shown that over a period of %B1 3 months around the announcement date the abnormal stock price effect is 3.4 to 4.6 times as high as the mere tax saving effect induced by the one-time dividend payment. Moreover, according to the managerial discretion hypothesis we find the stock price effect to be significantly lower for those companies generating the tax saving without paying out cash to shareholders.