The Effect of the Tax Cuts and Jobs Act on Payout Policies

68 Pages Posted: 3 Sep 2019 Last revised: 22 Nov 2024

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University - Questrom School of Business

Benjamin Bennett

Tulane University - A.B. Freeman School of Business

Petro Lisowsky

Boston University - Department of Accounting; Norwegian Center for Taxation

Zexi Wang

Lancaster University

Date Written: March 4, 2024

Abstract

We study the effect of the Tax Cuts and Jobs Act of 2017 (TCJA) on corporate payout policies with respect to share repurchases and dividends. The TCJA generated a tax windfall through two key elements—a change in international tax rules and an income tax cut. Using monthly repurchase data and quarterly dividend data, we find that the international tax element drove a significant increase in repurchases, but not dividends, whereas the income tax cut element increased dividends, but not repurchases. We then examine agency-related attributes to interpret our results. We find that repurchases are concentrated in firms with strong corporate governance. Firms with low board cooption, low managerial entrenchment, more long-term investors, low financial constraints, and those likely to over-invest, return excess cash through repurchases. Managers also repurchase shares at relatively higher market prices, consistent with returning excess cash to shareholders to alleviate the free cash flow problem. Finally, repurchases are greater in firms where equity incentives are weaker, consistent with repurchases being used to reduce excess cash available to managers when potential agency conflicts are greater. We do not find significant variation in dividend payouts based on corporate governance attributes, likely due to their stickiness. Overall, the evidence suggests that the TCJA increased corporate payouts, with repurchases reliably reflecting an efficient disgorgement of excess cash. 

Keywords: Stock Repurchase, Dividend, TCJA, Repatriation, Income Tax

JEL Classification: G35, M41, M48

Suggested Citation

Albuquerque, Ana M. and Bennett, Benjamin and Lisowsky, Petro and Wang, Zexi, The Effect of the Tax Cuts and Jobs Act on Payout Policies (March 4, 2024). Available at SSRN: https://ssrn.com/abstract=3443656 or http://dx.doi.org/10.2139/ssrn.3443656

Ana M. Albuquerque

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-358-4185 (Phone)
617-353-6667 (Fax)

HOME PAGE: http://sites.google.com/bu.edu/ana-albuquerque/home

Benjamin Bennett (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

HOME PAGE: https://sites.google.com/site/benjaminbennettfinance/home

Petro Lisowsky

Boston University - Department of Accounting ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

Zexi Wang

Lancaster University ( email )

Lancaster University Management School
Bailrigg
Lancaster, LA1 4YX
United Kingdom

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