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Did the 2003 Tax Act Increase Capital Investments by Corporations?

44 Pages Posted: 5 Jan 2010 Last revised: 29 Oct 2013

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

James Chyz

University of Tennessee

Dan S. Dhaliwal

University of Arizona - Department of Accounting

William C. Schwartz Jr.

Oklahoma State University

Date Written: April 15, 2013

Abstract

On May 28, 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act) reduced shareholder-level taxes on dividends and capital gains. One of the goals of the 2003 Tax Act was to encourage capital investment by corporations. We investigate whether firms increased investment in response to the Act. We first document that capital expenditures increase after the 2003 Tax Act. We then use a difference-in-differences research design to show that this increase in capital expenditures varies predictably with two shareholder-level tax-motivated hypotheses. First, we find that the increase in investment is smaller for firms largely held by investors that are less sensitive to shareholder-level taxes. Second, we find that the increase in investment is larger for firms most likely to fund investment from new equity issuances rather than internal funds. Additional analysis suggests that while the majority of firms increase investment after the tax cut, a small subset of larger, older, and cash-rich firms increased dividend payout instead. Overall, our results suggest that, consistent with the intent of policymakers, the shareholder-level tax rate reductions set forth in the 2003 Tax Act increased corporate investment.

Keywords: investment, cost of capital, institutional ownership, shareholder taxes

JEL Classification: G12, G31, G32, H24

Suggested Citation

Campbell, John L. and Chyz, James and Dhaliwal, Dan S. and Schwartz, William C., Did the 2003 Tax Act Increase Capital Investments by Corporations? (April 15, 2013). Journal of American Taxation Association, Vol. 35, No. 2, October 2013: 33-63. Available at SSRN: https://ssrn.com/abstract=1531978 or http://dx.doi.org/10.2139/ssrn.1531978

John L. Campbell

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

James Chyz

University of Tennessee ( email )

Knoxville, TN
United States
865-974-1701 (Phone)

Dan S. Dhaliwal

University of Arizona - Department of Accounting ( email )

McClelland Hall
PO Box 210108
Tucson, AZ 85721
United States

William C Schwartz Jr. (Contact Author)

Oklahoma State University ( email )

201 Business
Stillwater, OK 74078-0555
United States
918-594-8168 (Phone)
918-594-8281 (Fax)

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