What Do Firms Do When Dividend Tax Rates Change? An Examination of Alternative Payout Responses to Dividend Tax Rate Changes

Abstract:     
This paper investigates the responsiveness of corporate payout policy to individual-level taxes using a setting where individual-level tax rates are expected to increase. We predict and find a surge of special dividends in the final months of 2010, immediately before individual-level dividend tax rates were expected to increase (but did not). Consistent with prior research on dividend taxes and payout, we find that much of the increase is concentrated in firms largely held by insiders. In addition, we find evidence that firms alter the timing of their regular dividend payments by shifting what would normally be January, 2011 regular dividend payments into December of 2010. To our knowledge this is the first evidence in the literature about the timing of regular dividend payments in response to tax law changes. The changing of the timing of regular dividend payments is consistent with Slemrod’s (1992) framework of taxpayer responsiveness to tax changes.

Number of Pages in PDF File: 53

Keywords: Dividend taxes, payout policy

working papers series