Cutting the Dividends Tax . . . And Corporate Governance Too?

Abstract

Economists tend to agree that the recent cutting of dividends taxes will encourage investment and reduce financial distress. In addition to creating these benefits, however, the tax cut can also increase governance costs. For example, by removing a bias for leveraged capital structures, the tax cut foregoes debt's superiority on at least three dimensions:

1. Evaluating and monitoring demanders of financial capital;

2. Constraining managerial agents' from opportunistically employing capital market proceeds; and

3. Encouraging non-financial stakeholders (e.g., employees, suppliers) to make firm-specific investments.

Moreover, because these privately produced services contribute to the integrity of broader financial markets (i.e., a public good), competitive forces may not fully counter the tax cut's governance consequences.

Keywords: Dividends Tax, Corporate Governance

JEL Classification: G32, G38, H25