What If Dividends Were Tax‐Exempt? Evidence from a Natural Experiment

43 Pages Posted: 4 Jun 2018 Last revised: 16 May 2019

See all articles by Dušan Isakov

Dušan Isakov

University of Fribourg - Faculty of Economics and Social Science

Christophe Perignon

HEC Paris - Finance Department

Jean-Philippe Weisskopf

Ecole hôtelière de Lausanne

Date Written: May 15, 2019

Abstract

We study the effect of dividend taxes on the payout and investment policy of publicly listed firms. To do so, we exploit a unique setting in Switzerland where some, but not all, firms were suddenly able to pay tax-exempt dividends to their shareholders following the corporate tax reform of 2011. Using a difference-in-differences specification, we show that treated firms permanently increase their payout by around 30% compared to control firms after the tax cut. The rise in dividends is not compensated by an equally-sized reduction in share repurchases. In the cross-section, the impact on payout is much less pronounced in firms where the controlling shareholders have more voting rights than cash-flow rights. However, reducing dividend taxes does not boost investment. The tax-inelasticity of investment is due to a significant drop in retained earnings and to the fact that equity issuances do not surge after the tax cut. Overall, we interpret our findings as evidence for the distortive effect of dividend taxes on the allocation of capital across firms.

Keywords: corporate taxes, dividends, pay-outs, investment, real effects

JEL Classification: G35, G38

Suggested Citation

Isakov, Dušan and Perignon, Christophe and Weisskopf, Jean-Philippe, What If Dividends Were Tax‐Exempt? Evidence from a Natural Experiment (May 15, 2019). Paris December 2018 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=3190485 or http://dx.doi.org/10.2139/ssrn.3190485

Dušan Isakov

University of Fribourg - Faculty of Economics and Social Science ( email )

Fribourg, CH 1700
Switzerland

Christophe Perignon (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Jean-Philippe Weisskopf

Ecole hôtelière de Lausanne ( email )

Route de Cojonnex 18
Lausanne, 1000
Switzerland

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