Dividends and Taxes: The Moderating Role of Agency Conflicts

54 Pages Posted: 26 May 2017 Last revised: 10 May 2019

See all articles by Janis Berzins

Janis Berzins

BI Norwegian Business School

Øyvind Bøhren

BI Norwegian Business School

Bogdan Stacescu

BI Norwegian Business School

Date Written: May 6, 2019

Abstract

We find that potential conflicts between majority and minority shareholders strongly influence how dividends respond to taxes. When the controlling shareholder has a smaller stake, the incentives to extract private benefits are stronger – a shareholder conflict that can be mitigated by dividend payout. We study 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, suggesting that dividend policy trades off tax and agency considerations. The average payout ratio falls by 30 percentage points when the conflict potential is low, but by only 18 points when it is 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

Berzins, Janis and Bøhren, Øyvind and Stacescu, Bogdan, Dividends and Taxes: The Moderating Role of Agency Conflicts (May 6, 2019). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 540/2017. Available at SSRN: https://ssrn.com/abstract=2973551 or http://dx.doi.org/10.2139/ssrn.2973551

Janis Berzins (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Øyvind Bøhren

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway
46410503 (Phone)

Bogdan Stacescu

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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