Investor Protection, Taxation, and Dividends

Abstract:     
We test the impact of taxes and governance systems on dividend payouts across countries. We show that, unlike previous studies, firms in strong investor protection countries pay lower cash dividends than in weak protection countries when the classical tax system is implemented, but they repurchase more shares to maximise their shareholders’ after-tax returns. In weak protection countries, cash dividends and repurchases are low and less responsive to taxes. Our results suggest that when investors are protected, they weigh the tax cost of dividends against the benefit of mitigating the agency cost, but, when they are not, they accept whatever dividends they can extract, even when this entails high tax costs.

Number of Pages in PDF File: 51

Keywords: Shareholder rights, Dividend policy, Dividend taxation, Agency costs

JEL Classification: G18, G35, H24

Accepted Paper Series