Payout Policy in Brazil: Dividends Versus Interest on Equity

36 Pages Posted: 12 Jun 2010 Last revised: 24 Oct 2020

See all articles by Thomas J. Boulton

Thomas J. Boulton

Miami University

Marcus V. Braga-Alves

Pace University - Lubin School of Business

Kuldeep Shastri

University of Pittsburgh - Finance Group

Date Written: June 10, 2010

Abstract

We examine the impact of tax burden on cash distribution using a sample of Brazilian firms, which are allowed by law to distribute cash to shareholders in two forms: dividends and tax-advantaged interest on equity. The Brazilian institutional setting is superior to those used in prior studies that examine the choice between dividends and capital gains because, in some cases, dividends provide advantages that outweigh their negative tax consequences, leading firms to rationally choose payout policies that are not optimal when viewed only from the perspective of taxes. We find that taxes are a primary determinant of Brazilian firms’ payout policy decisions, as profitability and payout ratios (nonequity tax shields) are positively (negatively) related to the likelihood that a firm pays interest on equity. However, many firms continue to pay dividends despite the tax advantages of interest on equity payments. Abnormal returns around payout policy announcements suggest that these firms are, at least in part, catering to investor demand.

Keywords: Payout policy, interest on equity, dividends, taxes

JEL Classification: G35

Suggested Citation

Boulton, Thomas J. and Braga-Alves, Marcus V. and Shastri, Kuldeep, Payout Policy in Brazil: Dividends Versus Interest on Equity (June 10, 2010). Journal of Corporate Finance, Vol. 18, No. 4, 2012, Pace University Finance Research Paper No. 2010/04, Available at SSRN: https://ssrn.com/abstract=1623391

Thomas J. Boulton

Miami University ( email )

3028 Farmer School of Business
Oxford, OH 45056
United States
(513) 529-1563 (Phone)
(513) 529-8598 (Fax)

Marcus V. Braga-Alves (Contact Author)

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States

Kuldeep Shastri

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~ks112354

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