Tax Motivated Payout Financing

Posted: 16 Aug 2017

See all articles by Nan Liu

Nan Liu

Peking University

Naqiong Tong

Peking University

Alan Tucker


Multiple version iconThere are 2 versions of this paper

Date Written: August 15, 2017


Many firms, even those that are cash rich, routinely engage in costly borrowing and, more rarely, equity issuance in order to finance their payouts. A reported motive for this payout-financing behavior is the sheltering of corporate income tax. We present a model of a firm that maximizes its after-tax cash flow through jointly selecting the amount of its profits to recognize in a foreign tax haven and the amount of new capital it raises. The firm is subject to fixed payouts as well as a constraint on raising new capital. Consistent with U.S. tax law, the firm cannot use foreign-recognized earnings to finance payouts without triggering domestic taxation. The model shows that under certain benign conditions it may be optimal to raise external capital to meet payouts rather than using internally-generated cash flow. Consistent with this shelter-finance-payout strategy, we find that sticky-dividend firms that have more foreign earnings subject to repatriation taxes use more debt to finance their ordinary dividends. In addition, sticky-dividend firms that are tax aggressive use more debt to finance their ordinary dividends. Finally, sticky-dividend firms that are tax aggressive use more debt to finance their ordinary dividends if their domestic tax rate (cost of borrowing) is high (low).

Keywords: Tax aggression, repatriation tax, payout policy, dividend policy, share repurchase

JEL Classification: G32, K34

Suggested Citation

Liu, Nan and Tong, Naqiong and Tucker, Alan, Tax Motivated Payout Financing (August 15, 2017). Available at SSRN:

Nan Liu

Peking University ( email )

HSBC Business School
Shenzhen, 518055

Naqiong Tong (Contact Author)

Peking University ( email )

PHBS Business School
86-755-2603-2535 (Phone)

Alan Tucker

Independent ( email )

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