The Cash Flow Sensitivity of Cash Dividends in Different Dividend Taxation Systems

Abstract

This paper investigates the cash flow sensitivity of cash dividends in different cash dividend taxation systems. Using a cross-country study, we find that a firm's dividend policy in a single dividend taxation system (relative to a double dividend taxation system) is more sensitive to cash flow as measured by the propensity to initiate a cash dividend, propensity to pay a cash dividend, and in the size of the cash dividend. The cash flow sensitivity of cash dividends is asymmetric -- firms in single taxation systems more aggressively adjust dividend policy when confronted with negative rather than positive cash flows. Our findings are qualitatively identical before and after the 2003 dividend tax cut in the United States.