What Do Firms Do When Dividend Tax Rates Change? An Examination of Alternative Payout Responses
48 Pages Posted: 25 May 2012 Last revised: 30 Nov 2013
Date Written: November 26, 2013
This paper investigates whether investor-level taxes affect corporate payout policy decisions. We predict and find a surge of special dividends in the final months of 2010 and 2012, immediately before individual-level dividend tax rates were expected to increase. We also find evidence that immediately before the expected tax increases, firms altered the timing of their regular dividend payments by shifting what would normally be January regular dividend payments into December. To our knowledge this is the first evidence in the literature about the timing of regular dividend payments in response to tax law changes. For both actions (specials and shifting), we find that it was more likely for a firm to respond to individual-level tax rates if insiders owned a relatively large amount of the firm. Overall, our paper provides evidence that managers consider individual-level taxes in making payout decisions.
Keywords: Dividend taxes, payout policy
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