Uncertainty and Firm Dividend Policy – a Natural Experiment

58 Pages Posted: 20 May 2016 Last revised: 15 Oct 2021

See all articles by Bonnie Buchanan

Bonnie Buchanan

Surrey Business School, University of Surrey

Cathy Cao

Seattle University

Eva Liljeblom

Swedish School of Economics and Business Administration

Susan Weihrich

Seattle University - Albers School of Business and Economics

Date Written: May 2, 2016

Abstract

We examine how firms respond to uncertainty around U.S. tax policy changes, namely the individual level tax rate increases set to take effect on January 1, 2011 and January 1, 2013. We provide evidence that firms time the uncertainty in the tax environment and revise their dividend policy to an expected tax increase. We find that firms are likely to initiate their dividends or intensively increase their existing dividend amount one year before the expected tax increase. In addition, in 2012 when there is much less uncertainty on dividend tax changes than in 2010, firms are less likely to initiate a regular dividend but are more likely to initiate special dividends. The results suggest that firms facing less tax uncertainty are less likely to make long-term commitments on regular dividend payments but are more likely to take advantage of the last-minute low tax benefits by issuing special dividends. Furthermore, the response to the possible elimination of a tax cut was strongest in firms with high levels of tax-affected ownership, supporting the argument that when facing policy uncertainty, firms behave to prepare for the worst scenarios from the viewpoint of the shareholders, which in this case is a tax increase.

Keywords: dividend taxes, uncertainty, payout policy, special dividends

JEL Classification: G35, G32, G38, H32

Suggested Citation

Buchanan, Bonnie and Cao, Cathy and Liljeblom, Eva and Weihrich, Susan, Uncertainty and Firm Dividend Policy – a Natural Experiment (May 2, 2016). Bank of Finland Research Discussion Paper No. 11/2016, Available at SSRN: https://ssrn.com/abstract=2774127

Bonnie Buchanan (Contact Author)

Surrey Business School, University of Surrey ( email )

Guildford
Guildford, Surrey GU2 5XH
United Kingdom

Cathy Cao

Seattle University ( email )

900 Broadway
Seattle, WA 98122
United States

Eva Liljeblom

Swedish School of Economics and Business Administration ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland
+358-9-431 33 291 (Phone)
+358-9-431 33 393 (Fax)

Susan Weihrich

Seattle University - Albers School of Business and Economics ( email )

901 12th Avenue
Seattle, WA 98122
United States

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