Investor-Level Taxes and Corporate Dividend Policy: Evidence from a Quasi-Natural Experiment

30 Pages Posted: 11 Feb 2022

See all articles by Garry J. Twite

Garry J. Twite

University of Melbourne - Department of Finance; University of Melbourne - Faculty of Business and Economics; Financial Research Network (FIRN)

Jin Roc Lv

Australian National University (ANU)

Emma Schultz

Australian National University (ANU)

Date Written: December 9, 2021

Abstract

We utilise a change to the treatment of franking credits in the hand of domestic shareholders, namely the introduction of fully refundable franking credits, to provide robust evidence on the causal effect of investor-level taxes on corporate dividend policy. Consistent with investors having a greater preference for the distribution of dividends, we find that the introduction of fully refundable franking credit increases both the likelihood that firms pay dividends and the level of the dividend payments they make. Subsequent analysis reveals that effective tax rate and firm size explain cross-sectional variation in dividend policy responses to the tax reform, with large firms and firms with high effective tax rates more likely to pay dividends and to pay larger dividends than their peers.

Keywords: Corporate dividend policy; Dividend imputation system; Franking credit refundability; Australian tax law reform

JEL Classification: G35; H24; H25

Suggested Citation

Twite, Garry J. and Twite, Garry J. and Lv, Jin Roc and Schultz, Emma, Investor-Level Taxes and Corporate Dividend Policy: Evidence from a Quasi-Natural Experiment (December 9, 2021). Available at SSRN: https://ssrn.com/abstract=3984631 or http://dx.doi.org/10.2139/ssrn.3984631

Garry J. Twite (Contact Author)

University of Melbourne - Faculty of Business and Economics ( email )

Department of Finance
Melbourne, VIC 3010
Australia
+61 3 90356172 (Phone)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Jin Roc Lv

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Emma Schultz

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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