Dividend Taxes, Firm Growth, and the Allocation of Capital

Abstract

This paper investigates the 2013 three-fold increase in the French dividend tax rate. Using administrative data covering the universe of firms from 2008- 2017 and a quasi-experimental setting, we find that firms swiftly cut dividend payments and used this tax-induced increase in liquidity to accumulate more capital and labor, resulting in higher revenues. Heterogeneity analyses show that firms with high demand and returns to capital responded most, while no group of treated firms reduced their capital. Our results reject models in which higher dividend taxes increase the cost of capital and show that the tax-induced increase in liquidity relaxes financial constraints, which can reduce capital misallocation.