Political Affiliation and Dividend Tax Avoidance: Evidence from the 2013 Fiscal Cliff

39 Pages Posted: 14 Mar 2014  

Urs Peyer

INSEAD - Finance

Theo Vermaelen

INSEAD - Finance

Date Written: March 12, 2014

Abstract

This paper uses the 2013 fiscal cliff as a natural experiment to examine how the political affiliation of the CEO affected a firm’s response to an expected increase in personal taxes on dividends. Firms could avoid such additional taxes by paying extra dividends and accelerating dividends in the last two months of 2012. These tax avoiders are compared with a sample that could have easily accelerated dividend payments, but did not. We find that the difference in behaviour between firms that avoid taxes and firms that do not, but could have, is explained by the CEO’s political sympathies: Republican CEOs are more likely to help their investors to save money on income taxes. However, other effects seem to be more significant, such as: the consequences for the CEO’s personal wealth as well as the percentage of insider holdings. Larger firms are also more reluctant to engage in avoiding taxes for “the rich”, possibly indication reputational concerns.

Keywords: Supply Chain, Information Transfers, Analyst Following, Forecast Revisions, Forecast Accuracy

Suggested Citation

Peyer, Urs and Vermaelen, Theo, Political Affiliation and Dividend Tax Avoidance: Evidence from the 2013 Fiscal Cliff (March 12, 2014). INSEAD Working Paper No. 2014/20/FIN. Available at SSRN: https://ssrn.com/abstract=2407997 or http://dx.doi.org/10.2139/ssrn.2407997

Urs C. Peyer (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4178 (Phone)
+33 1 6072 4045 (Fax)

Theo Vermaelen

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
33 1 60 72 42 63 (Phone)
33 1 60 72 40 45 (Fax)

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