The Lock-In Effect and the Corporate Payout Puzzle

ISER DP No. 1070, 2019

47 Pages Posted: 27 Dec 2019

See all articles by Chris Mitchell

Chris Mitchell

Osaka University - Institute of Social and Economic Research

Date Written: December 2, 2019

Abstract

Taxes on capital gains are deferred until realization, whereas dividend taxes are levied upon accrual. This often makes dividends tax-disadvantaged relative to share repurchases, which leads to the payout puzzle: why do firms pay dividends? This paper develops a model of corporate payout policy to demonstrate that tax deferment can also provide a partial solution to the payout puzzle: if shareholders demand repurchase premiums when selling equity back to a firm - as compensation for accelerated realizations - then dividend payments can become tax-efficient. This mechanism is appealing because it jointly explains a number of payout regularities without appealing to asymmetric information, incomplete contracting, repurchase constraints, and/or shareholder irrationality.

Keywords: Payout Policy, Capital Taxation, Portfolio Choice

JEL Classification: G35, H24, G50

Suggested Citation

Mitchell, Chris, The Lock-In Effect and the Corporate Payout Puzzle (December 2, 2019). ISER DP No. 1070, 2019, Available at SSRN: https://ssrn.com/abstract=3499339 or http://dx.doi.org/10.2139/ssrn.3499339

Chris Mitchell (Contact Author)

Osaka University - Institute of Social and Economic Research ( email )

6-1, Mihogaoka
Suita, Osaka 567-0047
Japan

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