Agency Costs and Dividends in Presence of Dividend Taxes: Evidence from Seos
53 Pages Posted: 5 Jul 2017
Date Written: July 3, 2017
We examine the interaction of dividends, agency costs and taxes on SEO valuations using the 2003 dividend tax cut as a natural experiment. We find the difference in SEO announcement-day returns between dividend- and non-dividend-paying firms disappears after the tax cut evidencing dividend status dependent revaluations. Incorporation of agency costs reveals the marginal impact of excess cash flows on stock prices increases for high-growth, non-dividend-paying firms after the tax cut. Simultaneously, book leverage for non-dividend-paying firms decreases suggesting the shareholders expect to corner a greater proportion of returns in future. Overall, our findings support that dividend payouts lower agency costs.
Keywords: SEO, JGTRRA, Dividend, CARs, Agency theory
JEL Classification: G24, G32, G35
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