The Cost of Misaligned Tax Incentives: Evidence from Tax-Motivated Special Dividends

61 Pages Posted: 12 Mar 2020 Last revised: 7 Jul 2020

See all articles by Trent Krupa

Trent Krupa

University of Connecticut - Department of Accounting

Steven Utke

University of Connecticut - Department of Accounting

Date Written: July 4, 2020

Abstract

Prior research finds that firms pay special dividends before a dividend tax increase. We examine the real effects of this decision, finding that firms incur costs to pay these tax-motivated special dividends. Specifically, firms reduce investment and repurchases to pay these dividends. Further, the source of funding varies with the tax incentives of shareholders. When (tax-insensitive) institutional investors likely influence the dividend, for the benefit of shareholders other than insiders, firms reduce repurchases and capital expenditures. Conversely, misaligned tax incentives between insiders and other shareholders are associated with a reduction in R&D, consistent with managerial myopia which erodes shareholder value. Tests using both market responses to tax-motivated special dividend announcements and total factor productivity changes around the dividends support these conclusions. These findings add to our understanding of tax-based agency issues influencing real corporate decisions.

Keywords: Investment, Agency Costs, Tax-Sensitivity, Dividend Payout Policy, Institutional Ownership, Shareholder-Level Taxes, JGTRRA, ATRA

JEL Classification: G35, H24, H32

Suggested Citation

Krupa, Trent and Utke, Steven, The Cost of Misaligned Tax Incentives: Evidence from Tax-Motivated Special Dividends (July 4, 2020). University of Connecticut School of Business Research Paper No. 20-05, Available at SSRN: https://ssrn.com/abstract=3541067 or http://dx.doi.org/10.2139/ssrn.3541067

Trent Krupa (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

Steven Utke

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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