Dividend Tax Cut Research Articles

CEO ownership and firm performance: Evidence from the 2003 dividend tax cut

AbstractThis study investigates the performance consequences of changes in the optimality of chief executive officer (CEO) ownership by using the 2003 dividend tax cut (DTC) as an exogenous shock. I find that CEO ownership of dividend payers significantly increased after the DTC in the form of higher annual restricted stock grants and more option exercises. I also document that more optimal ownership is associated with performance improvement and more efficient R&D investment. Overall, findings from my study provide insights into the role of managerial equity incentives for firm performance.

Does dividend policy affect sales growth in product markets? Evidence from the 2003 dividend tax cut

AbstractWe examine the effect of firms’ dividend policy on product market outcomes. Exploiting the 2003 dividend tax cut as the exogenous increase in demand for dividends from tax‐sensitive shareholders, we show that firms that raised dividends in response to the tax cut recorded lower sales growth in product markets after the tax cut. These firms experienced a reduction in financial flexibility, which led to a decrease in investment activities. Despite the negative effects of dividends on sales growth, firm value increased on average, indicating that the firms raised dividends when the shareholder benefits outweighed the costs.

Dividend taxes, employment, and firm productivity

The paper examines the effect of dividend taxation on employment and productivity. I exploit a dividend tax cut of 10 percentage points for closely held private corporations in Sweden. Using data on all closely held Swedish firms with exact information on employees and their wages, I find that firms with limited internal funds increase productivity and wages relative to firms with sufficient internal funds whose investment decisions are less affected by dividend taxes. My findings indicate that dividend taxes constrain firms in investing efficiently. Lower taxes can result in higher capital and labor input and, thus, in higher productivity.

Dividend Taxes, Employment, and Firm Productivity

The paper examines the effect of dividend taxation on employment and productivity. I exploit a dividend tax cut of 10 percentage points for closely held private corporations in Sweden. Using data on all closely held Swedish firms with exact information on employees and their wages, I find that firms with limited internal funds increase productivity and wages relative to firms with sufficient internal funds whose investment decisions are less affected by dividend taxes. My findings indicate that dividend taxes constrain firms in investing efficiently. Lower taxes can result in higher capital and labor input and, thus, in higher productivity.

Does tax really matter for corporate payout policy: Evidence from a policy experiment in South Korea

To promote corporate dividends, in 2014, the Korean government introduced a temporary tax reform that lowered the personal income tax burden on dividends from “high-dividend firms” that meet certain requirements as defined under the tax code. This study applies this unique tax reform as a natural experiment to examine whether dividend tax cuts are effective in increasing corporate dividends. This tax cut applied to listed (but not unlisted) firms. Taking advantage of this fact, we employed the difference-in-difference matching estimator for our analysis. Our results show that the reform has little effect on increasing corporate payout, as well as the number of firms paying dividends. This finding is consistent with previous studies that provided supporting evidence for the new view proposed by Auerbach (1979), Bradford (1981), and King (1977). Moreover, we show that firms' profitability and ownership structure are key factors that enable firms to satisfy the qualifying requirements for high-dividend firms.

Dividend taxes and payout policy: Evidence from Korea’s 2015-2017 dividend tax cut

The Korean government temporarily lowered dividend tax rates for investors of firms that significantly increased dividend payments in 2015-2017. We examine how the dividend tax cut affects corporate payout policies. We found substantial dividend payment growth in the qualifying firms, mainly funded by operating cash flow; neither cash holding nor share repurchase is significantly reduced. The insider ownership is found to be an important factor in driving a continual enjoyment of the dividend tax cut. Yet, a large proportion of firms only temporarily enjoy the dividend tax cut in 2015, which argues against slow adjustments in dividend payout policy.

Do Managers Pay CSR for Private Motivation? A Dividend Tax Cut Case in Korea

A CEO who has an opportunity to pursue his interest may sacrifice investors with inefficient investments such as overinvestment in corporate social responsibility (CSR). As prior researchers have suggested a possibility to detect the perk portion of CSR investment using the dividend tax cut event, we tested whether managers decreased CSR spending while accelerating dividend payouts during the Korean dividend tax cut of 2015. Consistent with the prior studies on the dividend tax cut, we discovered a pattern of incremental dividend increase for the companies of agency conflict measured by extreme CEO ownership. However, we failed to find any statistically significant simultaneous reduction in donations after 2015. This study does not provide evidence that investments in CSR of Korean firms are not due to CEOs’ personal interest-seeking. Instead, we showed that the dividend tax cut event may not work as a universally applicable quasi-experimental setting to detect management overinvestments in CSR.

Announcement effects of dividend tax cuts and corporate policies: evidence from Malaysia REITs

This study examines the effect of dividend tax changes on the share prices and corporate policies of Malaysian REITs. Event study results show that dividend tax cut announcements provide positive abnormal returns. Based on cross-sectional regression, the abnormal returns are found to be larger for REITs with a higher retail ownership. The implementation of dividend tax cuts also increases dividend payout and reduce investment activities. These results partly support the traditional view of dividend taxation which posits that tax reform could affect economic efficiency and resource allocation in an economy.

What explains the change in a firm’s idiosyncratic volatility after a dividend initiation?

Purpose – The purpose of this paper is to identify three (maturity, agency, and information) effects that help explain the change in idiosyncratic volatility after a firm initiates a dividend. Design/methodology/approach – The paper uses a cross-sectional analysis where the standard errors are adjusted for heteroskedasticity. As for robustness check, the authors perform two-stage analysis to control for potential self-selection bias. The authors also control for 2003 Dividend Tax Cut effect, matching-firm volatility, and confounding events. Findings – Using a sample of 688 dividend-initiating firms for a period of 1977 to 2010, the authors find evidence consistent with the hypotheses based on the maturity, agency, and information effects. The volatility changes upon the dividend initiation can be reliably explained by the changes in profit volatility and free cash flow per total assets, and whether the firm consummated a stock split prior to the dividend initiation. The information effect is also found to be economically significant. Originality/value – By studying a firm’s decision to initiate a dividend and its impact on the change in its volatility, the research helps contribute to the payout policy and volatility literatures.

Ex day effects of the 2003 dividend tax cut

We analyze ex day dynamics around the May 2003 dividend tax cut in a framework with arbitrageurs as liquidity providers. Raw returns and ratios for all groups don't change significantly around the event but the volatilities decline significantly. The volume declines more (less) strongly for high (low) yields. This is consistent with the reduction in the differential tax rates leading to a reduced demand for capital losses around the ex day, and a reduction in informed trading. The price dynamics for the one week before and after periods also support a market microstructure explanation. Evidence on market quality is mixed.

Do dividend taxes affect corporate investment?

We test whether dividend taxes affect corporate investments. We exploit Sweden's 2006 dividend tax cut of 10 percentage points for closely held corporations and 5 percentage points for widely held corporations. Using rich administrative panel data and triple-difference estimators, we find that this dividend tax cut does not affect aggregate investment but that it affects the allocation of corporate investment. Cash-constrained firms increase investment after the dividend tax cut relative to cash-rich firms. Reallocation is stronger among closely held firms that experience a larger tax cut. This result is explained by higher external equity in cash-constrained firms and by higher dividends in cash-rich firms after the tax cut.

Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut

This paper tests whether the 2003 dividend tax cut—one of the largest reforms ever to a US capital tax rate—stimulated corporate investment and increased labor earnings, using a quasi-experimental design and US corporate tax returns from years 1996–2008. I estimate that the tax cut caused zero change in corporate investment and employee compensation. Economically, the statistical precision challenges leading estimates of the cost-of-capital elasticity of investment, or undermines models in which dividend tax reforms affect the cost of capital. Either way, it may be difficult to implement an alternative dividend tax cut that has substantially larger near-term effects. (JEL C72, C78, C91)

Do Dividend Taxes Affect Corporate Investment?

We test whether dividend taxes affect corporate investments. We exploit Sweden’s 2006 dividend tax cut of 10 percentage points for closely held corporations and five percentage points for widely held corporations. Using rich administrative panel data and triple-difference estimators, we find that this dividend tax cut does not affect aggregate investment but that it affects the allocation of corporate investment. Cash-constrained firms increase investment after the dividend tax cut relative to cash-rich firms. Reallocation is stronger among closely held firms that experience a larger tax cut. This result is explained by higher external equity in cash-constrained firms and by higher dividends in cash-rich firms after the tax cut. The heterogeneous investment responses imply that the dividend tax cut raises efficiency by improving allocation of investment.

Do Dividend Taxes Affect Corporate Investment

We test whether dividend taxes affect corporate investments. We exploit Sweden's 2006 dividend tax cut of 10 percentage points for closely held corporations and five percentage points for widely held corporations. Using rich administrative panel data and triple-difference estimators, we find that this dividend tax cut affects allocation of corporate investment. Cashconstrained firms increase investment after the dividend tax cut relative to cash-rich firms. Reallocation is stronger among closely held firms that experience a larger tax cut. This result is explained by higher nominal equity in cash-constrained firms and by higher dividends in cash-rich firms after the tax cut. The heterogeneous investment responses imply that the dividend tax cut raises efficiency by improving allocation of investment.

Managerial Ownership and Firm Performance: Evidence from the 2003 Dividend Tax Cut

Evidence on the causal effect of managerial ownership on firm performance is elusive due to lack of within-firm variations and credible empirical designs. We identify this causal effect by exploiting the 2003 Tax Cut as a natural experiment, which increased the net-of-tax effective managerial ownership. Consistent with predictions from agency theory, our difference-in-difference empirical design uncovers a significant and hump-shaped improvement in firm performance with respect to the level of managerial ownership. The increase in performance is more pronounced for firms subject to more severe agency problems as well as firms under weak alternative governance mechanisms, further demonstrating managerial ownership incentive as the underlying channel for our results.

Ex-Dividend Behaviour and the Clientele Effects: Evidence Based on Canadian and US Dividend Tax Cuts

We investigate the ex-dividend behaviour of TSX listed Canadian firms during a period when both U.S and Canadian governments cut taxes on dividend income. We test whether the tax differential between dividends and capital gains affects the stock price drop ratio on ex-dividend date. Using quarterly dividend date from 2002-2007, we also investigate the existence of dividend tax clientele effects. We provide empirical evidence that relative tax differential of dividends and capitals gain has significant effects on investor behaviour on ex-dividend date consistent with the hypothesis that dividend tax affects equity values. We also find evidence that Canadian Investors, not the US investors, are the marginal investor for Canadian securities. We suggest that the use of appropriate tax variables is essential for detecting the relationship between tax and ex-dividend day behaviour, as our study has shown that tax relevance hypothesis upholds when the marginal tax rate of Canadians is introduced as tax variable, unlike when that of the US is employed. These findings undermine the claims in some prior studies that tax is not relevant on ex-dividend day. Our study also documents dividend clientele effect using Canadian data. We provide evidence that dividend yield is positively related to drop ratio as in Elton and Gruber (1970) and inversely related to implied tax rates consistent with investors in high tax bracket being attracted to low dividend stocks and investors in low tax bracket preferring high dividend stocks. This clientele effect persists across different measures of drop ratio.

End of double taxation: Is the policy better when announced?

This paper examines the effectiveness of the “end of double taxation” (on dividends) policy in stabilizing an economy. Both announced and unannounced policies are considered. A reduction in double taxation stimulates investment and improves welfare, but its impact on output is moderate and it has a negative effect on work hours. A temporary cut creates an investment boom but also generates an investment slump when the tax cut expires. Announcements of future tax cuts are found to have important effect on output dynamics. Agents respond to the tax policy even before it is implemented. If the tax cut is announced to be temporary, its impact on output is greatly reduced. Our study suggests that a temporary dividend tax cut is most effective in stabilizing a recession stricken economy when the policy change comes as “news” to the economy.

Which Types of Firms React More to a Tax Cut? Evidence from the 2003 Dividend Tax Cut

The agency model of Chetty and Saez (2010) predicts that firms with stronger corporate governance are more responsive to a dividend tax cut in their dividend and investment policies. We test these predictions by exploiting the sudden and significant dividend tax cut following the Jobs and Growth Tax Relief Reconciliation Act of 2003 and the pre-tax cut variation in corporate governance standards across firms. We find that firms with stronger corporate governance raise dividends and reduce investment in response to the tax cut significantly more than firms with weaker corporate governance. These differential reactions come from differences in corporate governance standards but not differences in ownership concentration ratios.

Dividend Taxes and Investor Behavior: Evidence from the 2003 Dividend Tax Cut

The paper explores whether the enactment of the 2003 dividend preference resulted in tax-efficient changes to portfolio composition with respect to the allocation of stock to retirement savings accounts. Empirical results based on CLAD and STLS analysis of the Survey of Consumer Finances for 1998, 2001, 2004 and 2007 suggest that, assuming that liquidity is a normal good, taxpayers responded to the enactment of the dividend preference in a tax-efficient manner by increasing allocations to taxable accounts and away from tax-preferred accounts. Moreover the portion of retirement savings accounts allocated to stock decreased following the enactment of the dividend preference. Robustness checks and sensitivity analysis are performed with the use of synthetic panel data, as well as an analysis of the 2007-2009 “short panel” released on March 28, 2012 by the Survey of Consumer Finances, using fixed effects, random effects, and restricted panel data. Of particular interest, the analysis of the 2007-2009 panel reveal changes to portfolio allocation which were significant, and in the opposite direction of findings relating to the tax increase, lending confidence to the suggestion that the results observed between 2001 and 2004 were the result of the enactment of the dividend preference, and not as a consequence of the 2001-2002 market downturn, or changes in the composition of individuals entering or leaving the survey.

Dividend and capital gains taxation under incomplete markets

Motivated by the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003, the effects of capital income tax cuts are investigated in an economy with heterogeneous households and a representative, mature firm. Dividend tax cuts, contrary to capital gains tax cuts, lead to a decrease in investment and capital. This is because they increase the market value of existing capital and households require a higher return to hold this additional wealth. In line with empirical evidence, the model predicts substantial increases in dividends and stock prices. Overall, the tax cuts lead to a welfare reduction equivalent to a consumption drop of 0.5%.