Tax Uncertainty and Dividend Payouts
68 Pages Posted: 5 Apr 2017
Date Written: March 27, 2017
I examine whether and to what extent tax uncertainty affects a firm’s dividend payouts. Based on the argument that tax uncertainty impairs the persistence and predictability of after-tax cash flows, I hypothesize and find that firms with greater tax uncertainty exhibit a lower probability of dividend payouts. The effect of tax uncertainty is stronger in the presence of financial constraints and weaker for firms that distribute dividends to alleviate agency conflicts. Furthermore, I find a negative effect of tax uncertainty on dividend levels, which is moderated by the costs of dividend reductions. These results are economically meaningful as a one standard deviation higher tax uncertainty leads to a 9.9 percentage point lower probability and a $23.6 million reduction in dividend payouts. Taken together, my findings document a real effect of tax avoidance and contribute to the understanding of interactions between uncertain tax avoidance and a firm’s financial ecosystem.
Keywords: Tax Uncertainty, Tax Avoidance, Dividend Payouts, Real Effects, Share Repurchases
JEL Classification: G30, G35, H25, H26, H32
Suggested Citation: Suggested Citation