Interest on Equity versus Dividends: the Role of Shareholder Identity on Corporate Tax Avoidance

41 Pages Posted: 31 Aug 2021

See all articles by Jefferson Colombo

Jefferson Colombo

Sao Paulo School of Economics (FGV EESP)

Paulo R. S. Terra


Date Written: August 27, 2021


Most Brazilian public corporations have controlling majority shareholders. Meanwhile, the Brazilian tax code regarding payout income treats differently different kinds of shareholders depending upon their legal nature. Therefore, depending upon the controlling shareholder’s identity, the payout policy of Brazilian firms may be suboptimal for minority shareholders. We investigate this agency conflict in a sample of 404 Brazilian firms over 12 years. Using a novel measure for how much firms are exploiting the tax advantages of Interest on Equity – IOE (IOE/IOE*), we find evidence that the identity of the controlling shareholder influence both the way firms distribute profits (cash dividends or IOE), the propensity, and the amount paid out as IOE. The presence of institutional investors and firm listing in the special corporate governance segment in the stock exchange Novo Mercado significantly increase cash payouts in the form of IOE vis-à-vis cash dividends, reducing overall taxation (firm-level plus investor level) for the average firm. These results are robust to several model specifications and endogeneity tests. Overall, our evidence suggests that shareholders’ identity influences payout policy through the taxation channel.

Keywords: Ownership Structure, Shareholder Identity, Payout Policy, Tax Management, Corporate Governance, Interest on Equity.

JEL Classification: G35, G32, G34.

Suggested Citation

Colombo, Jefferson and Terra, Paulo Renato Soares, Interest on Equity versus Dividends: the Role of Shareholder Identity on Corporate Tax Avoidance (August 27, 2021). Available at SSRN: or

Jefferson Colombo (Contact Author)

Sao Paulo School of Economics (FGV EESP) ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000

HOME PAGE: http://

Paulo Renato Soares Terra

FGV-EAESP ( email )

Rua Itapeva 474 - 8o andar
Bairro Bela Vista
São Paulo, 01332-000
11-3799-7899 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics