The effect of ownership structure on corporate payout policy and performance: Evidence from Korea's exogenous dividends tax shock

Abstract

For three years, from 2015 to 2017, the Korean government granted temporary tax benefits to shareholders of firms that exceeded certain thresholds to qualify as high-dividend firms. Using the temporary tax cut as an exogenous tax shock imposed on the market, I examine the impact of the tax cut on high-dividend firms' changes in dividend policy and firm performance, focusing on ownership by majority shareholders. I find that the majority shareholders are more likely to meet the requirements of high-dividend firms to enjoy temporary tax benefits when they have more stake. I also reveal that the dividends increase with the majority shareholders' level of ownership in high-dividend firms, while tax-advantaged stock repurchases decrease. Finally, I find that the majority shareholders' level of ownership in high-dividend firms has a significantly negative effect on the firms' short- and long-term performance. These results suggest that the tax reforms led to agency problems.