What Do Firms Do When Dividend Tax Rates Change? An Examination of Alternative Payout Responses

51 Pages Posted: 13 Jul 2014

See all articles by Michelle Hanlon

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jeffrey L. Hoopes

University of North Carolina (UNC) at Chapel Hill - Accounting Area

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Abstract

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 the preceding December. To our knowledge this is the first evidence in the literature about changes in 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 corporate payout decisions.

Keywords: Dividend taxes, payout policy, special dividends

JEL Classification: G35, G32, G38, H32

Suggested Citation

Hanlon, Michelle and Hoopes, Jeffrey L., What Do Firms Do When Dividend Tax Rates Change? An Examination of Alternative Payout Responses. Journal of Financial Economics (JFE), Forthcoming; Fisher College of Business Working Paper No. 2014-02-002. Available at SSRN: https://ssrn.com/abstract=2450084

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-668
Cambridge, MA 02142
United States
617-253-9849 (Phone)

Jeffrey L. Hoopes (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

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