The Effect of the Tax Cuts and Jobs Act on Payout Policies: The Role of Corporate Governance

58 Pages Posted: 3 Sep 2019 Last revised: 5 Mar 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 Questrom School of Business; 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 through a corporate governance perspective. The TCJA generated a tax windfall through two key elements—a repatriation tax cut and an income tax cut. Using monthly repurchase data and quarterly dividend data, we find that the repatriation tax cut element drove a significant increase in repurchases, but not dividends, whereas the income tax cut element moderately increased dividends, but not repurchases. We examine agency-related reasons for our results. Although we find that dividend payouts do not vary based on corporate governance attributes, we find that repurchases are concentrated in firms with strong corporate governance, low financial constraints, and those likely to over-invest. We also find that managers repurchased shares at relatively higher market prices, and again the results are concentrated in firms with low financial constraints and those likely to over-invest. Finally, we find that repurchases are greater in firms where equity incentives are weaker and agency conflicts are more of a concern. Overall, the evidence suggests that repurchases in particular reflect strong corporate governance with respect to firms’ 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: The Role of Corporate Governance (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 Questrom School of Business ( email )

595 Commonwealth Avenue
Ste. 518H
Boston, MA 02215
United States
6173532661 (Phone)

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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