The Impact of Dividend Tax Cut and Managerial Stock Holdings on Firm's Dividend Policy

Abstract

This paper examines the effect of managerial stock holdings on corporate dividend payments under the new dividend tax environment. Utilizing a very rare event on dividend tax rate cut introduced in May 2003, this paper allows us to fully investigate whether managers holding sizable stakes direct their corporations to raise dividends for their own benefits. Our results show that managerial stock holdings have significantly positive effect on both the likelihood and the extent of dividend increase in year 2003. However, there is no such relation for the period of 1993 through 2002. Similar to the previous studies, managerial stock options are negatively related to dividend payment increases both before and after dividend tax cut.