Which Types of Firms React More to a Tax Cut? Evidence from the 2003 Dividend Tax Cut
Copenhagen Business School - Department of Economics
Chinese University of Hong Kong (CUHK) - Department of Economics
July 29, 2012
Paris December 2012 Finance Meeting EUROFIDAI-AFFI Paper
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.
Number of Pages in PDF File: 38
Keywords: Dividend Taxation, Corporate Governance, Dividends, Investment
JEL Classification: G31, G34, G35, H32working papers series
Date posted: June 12, 2012
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