Dividend Policy Inside the Firm

64 Pages Posted: 10 Jan 2002 Last revised: 12 Dec 2009

See all articles by Mihir A. Desai

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

James R. Hines Jr.

University of Michigan; NBER

Date Written: January 2002

Abstract

This paper analyzes dividend remittances by a large panel of foreign affiliates of U.S. multinational firms. The dividend policies of foreign affiliates, which convey no signals to public capital markets, nevertheless resemble those used by publicly held companies in paying dividends to diffuse common shareholders. Robustness checks verify that dividend policies of foreign affiliates are little affected by the dividend policies of their parent companies or parent company exposure to public capital markets. Systematic differences in the payout behavior of affiliates that differ in organizational form, and those that face differing tax costs of paying dividends, reveal the importance of tax factors; nevertheless, dividend policies are not solely determined by tax considerations. The absence of capital market considerations and the incompleteness of tax explanations together suggest that dividend policies are largely driven by the need to control managers of foreign affiliates. Parent firms are more willing to incur tax penalties by simultaneously investing funds while receiving dividends when their foreign affiliates are partially owned, located far from the United States, or in jurisdictions in which property rights are weak, all of which are implied by control theories of dividends.

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines, James Rodger, Dividend Policy Inside the Firm (January 2002). NBER Working Paper No. w8698. Available at SSRN: https://ssrn.com/abstract=296542

Mihir A. Desai (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
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National Bureau of Economic Research (NBER)

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C. Fritz Foley

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
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United States
617-495-6375 (Phone)

National Bureau of Economic Research (NBER)

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James Rodger Hines

University of Michigan ( email )

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Ann Arbor, MI 48109-1215
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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