Individual Investors’ Dividend Tax and Corporate Payout Policies – Evidence from a Reform that Ties the Dividend Tax Rate to Share Holding Period

43 Pages Posted: 15 Apr 2014

See all articles by Oliver Zhen Li

Oliver Zhen Li

National University of Singapore (NUS)

Hang Liu

Dongbei University of Finance and Economics

Chenkai Ni

Fudan University

Kangtao Ye

Renmin University of China - School of Business

Date Written: April 11, 2014

Abstract

The 2012 Dividend Tax Reform in China uniquely ties individual investors’ dividend tax rates to the length of their share holding period. We find that firms facing a reduction in their individual investors’ dividend tax rate are more likely to increase dividend payout, initiate dividends, and are less likely to omit dividends, compared with firms facing an increase in their individual investors’ dividend tax rate. Such an effect is concentrated in firms with a low level of agency cost. In addition, investors respond to this tax law change by reducing trading activities before the cum-dividend day to avoid entering into a higher dividend tax bracket. Further, stock return patterns on the ex-dividend day suggest that reduced trading activities lower the marginal investor’s dividend tax penalty. Overall, our evidence enhances the notion that individual investors’ tax profiles shape firms’ payout policies.

Keywords: individual investor, dividend tax, payout policy, agency cost

JEL Classification: G30, G35, H20

Suggested Citation

Li, Oliver Zhen and Liu, Hang and Ni, Chenkai and Ye, Kangtao, Individual Investors’ Dividend Tax and Corporate Payout Policies – Evidence from a Reform that Ties the Dividend Tax Rate to Share Holding Period (April 11, 2014). Available at SSRN: https://ssrn.com/abstract=2424666 or http://dx.doi.org/10.2139/ssrn.2424666

Oliver Zhen Li (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Hang Liu

Dongbei University of Finance and Economics ( email )

Dalian, 116025
China

Chenkai Ni

Fudan University ( email )

Guoshun Road 670
Yangpu
Shanghai, Shanghai 200433
China

Kangtao Ye

Renmin University of China - School of Business ( email )

Beijing
China

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