Agency Costs and Dividends in Presence of Dividend Taxes: Evidence from Seos

53 Pages Posted: 5 Jul 2017

See all articles by Puneet Prakash

Puneet Prakash

Missouri State University

Manu Gupta

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate

Nanda K. Rangan

Virginia Commonwealth University

Date Written: July 3, 2017

Abstract

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

Suggested Citation

Prakash, Puneet and Gupta, Manu and Rangan, Nanda K., Agency Costs and Dividends in Presence of Dividend Taxes: Evidence from Seos (July 3, 2017). Available at SSRN: https://ssrn.com/abstract=2996754 or http://dx.doi.org/10.2139/ssrn.2996754

Puneet Prakash (Contact Author)

Missouri State University ( email )

United States
65897 (Fax)

Manu Gupta

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284
United States

Nanda K. Rangan

Virginia Commonwealth University ( email )

2400 East Cary Street, Suite # 400
Richmond, VA 23223
United States
8048277410 (Phone)

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