Corporate Investment and Dividend Decisions Under Differential Personal Taxation
University of California, Los Angeles (UCLA) - Anderson School of Management
Ronald W. Masulis
University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)
Journal of Financial and Quantitative Analysis, Vol. 23, No. 4, 1998
This paper explores implications of differential personal taxation for corporate investment and dividend decisions. The personal tax advantage of dividend deferral causes shareholders to generally prefer greater investment in real assets under internal as opposed to external financing. Furthermore, dividend deferral is shown to be costly at the corporate level, causing shareholders in different tax brackets at times to disagree over optimal investment and dividend policies under internal financing. The profitability of internally-financed security investment is shown to depend on a security's tax status and shareholders' tax brackets. However, externally-financed security purchases are unprofitable from a tax standpoint.
Number of Pages in PDF File: 22
Keywords: Dividends, Investment, Personal Taxation, Corporate Taxation, Internal Financing, External Financing, Tax Brackets, Taxes, Shareholder Conflicts of Interest
JEL Classification: D23, G31, G35, H23, H24, H25
Date posted: February 12, 2007
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