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Payout Taxes and the Allocation of Investment

60 Pages Posted: 17 Oct 2010 Last revised: 4 Apr 2012

Bo Becker

Stockholm School of Economics; Centre for Economic Policy Research (CEPR)

Marcus Jacob

WHU - Otto Beisheim School of Management

Martin Jacob

WHU - Otto Beisheim School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: April 3, 2012

Abstract

When corporate payout is taxed, internal equity (retained earnings) is cheaper than external equity (share issues). If there are no perfect substitutes for equity finance, payout taxes may therefore have an effect on the investment of firms. High taxes will favor investment by firms who can finance internally. Using an international panel with many changes in payout taxes, we show that this prediction holds well. Payout taxes have a large impact on the dynamics of corporate investment and growth. Investment is “locked in” in profitable firms when payout is heavily taxed. Thus, apart from any level effects, payout taxes change the allocation of capital.

JEL Classification: G30, G31, H25

Suggested Citation

Becker, Bo and Jacob, Marcus and Jacob, Martin, Payout Taxes and the Allocation of Investment (April 3, 2012). Harvard Business School Finance Working Paper No. 11-040; AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1692742 or http://dx.doi.org/10.2139/ssrn.1692742

Bo Becker (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Dept. of Finance
111 60 Stockholm, 11160
Sweden

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Marcus Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

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