The Effect of the Tax Cuts and Jobs Act on Payout Policies
68 Pages Posted: 3 Sep 2019 Last revised: 22 Nov 2024
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: Suggested Citation