Dividends and Taxes: The Moderating Role of Agency Conflicts
66 Pages Posted: 26 May 2017 Last revised: 18 Jan 2019
Date Written: December 15, 2018
We find that potential conflicts between majority and minority shareholders strongly influence how dividends respond to taxes. Examining the population of firms with proprietary microdata on all family relationships and a million individual tax returns, we utilize a large and clean regulatory shock in Norway that increases the dividend tax rate for all individuals from 0% to 28%. We find that dividends drop less the higher the potential shareholder conflict. The average payout ratio falls
by 30 percentage points when the conflict potential is low, but by only 18 when high. These lower dividends cannot be explained by higher salaries to shareholders or diverse liquidity needs. We also observe a strong increase in indirect ownership of high-conflict firms through tax-exempt holding companies and suggest policy implications for intercorporate dividend taxation.
Keywords: Dividends; Taxes; Agency Costs; Shareholder Conflicts; Indirect Ownership
JEL Classification: G32; G35
Suggested Citation: Suggested Citation