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

63 Pages Posted: 4 Jun 2018 Last revised: 3 Aug 2020

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: July 15, 2020

Abstract

We study the effect of dividend taxes on the payout and investment policies of publicly listed firms. To do so, we exploit a unique setting in Switzerland where, following the corporate tax reform of 2011, some but not all firms were suddenly able to pay tax-exempt dividends to their shareholders. Using a difference-in-differences specification, we show that treated firms swiftly and permanently increase their dividend payout by around 30% compared to control firms after the tax cut. When studying the effect of agency conflicts, we show that the impact on the payout is less pronounced for firms in which the controlling shareholders have more voting rights than cash-flow rights. We find a significant positive abnormal stock return after the announcement of the payment of a tax-exempt dividend. However, reducing dividend taxes does not boost investment. This is due to a significant drop in retained earnings and to the fact that equity issuances do not surge after the tax cut. Our evidence is consistent with models where the marginal source of finance is retained earnings, and inconsistent with the neoclassical theory of dividend taxation.

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 (July 15, 2020). HEC Paris Research Paper Forthcoming, 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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