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Taxation and Dividend Policy: The Muting Effect of Agency Issues and Shareholder Conflicts

Review of Financial Studies, Forthcoming

56 Pages Posted: 1 Nov 2014 Last revised: 28 Jan 2017

Martin Jacob

WHU - Otto Beisheim School of Management

Roni Michaely

Johnson@Cornell Tech, Cornell University

Date Written: January 27, 2017

Abstract

Using proprietary data on the entire spectrum of ownership-structure and exact tax-status of investors and firms we examine how dividend taxation affects payout. Utilizing an exogenous shock to dividend taxation, we show that absent any frictions, dividend taxation has a large impact on payout. As agency issues and shareholder conflicts increase, owners’ tax-preferences have significantly smaller impact on payout. We identify three mechanisms that reduce the dividend-tax sensitivity: Coordination among owners, heterogeneity in tax preferences, and diverging objectives between managers and owners. Altogether, taxation has a first-order impact on payout, but agency issues and shareholder conflicts mute its impact substantially.

Keywords: Payout Policy, Dividend Taxes, Agency Costs, Ownership Structure

JEL Classification: G30, G35, H24, H25

Suggested Citation

Jacob, Martin and Michaely, Roni, Taxation and Dividend Policy: The Muting Effect of Agency Issues and Shareholder Conflicts (January 27, 2017). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2516927 or http://dx.doi.org/10.2139/ssrn.2516927

Martin Jacob (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

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

Roni Michaely

Johnson@Cornell Tech, Cornell University ( email )

111 8th Avenue #302
New York, NY 10011
United States

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