State Shareholder Taxation and Corporate Payout Policy

Abstract

Unlike dividends, share repurchases embed the right to time and locate state individual income taxes, letting shareholders mitigate tax costs. A parsimonious model predicts a negative relation between state tax rates and dividend payouts. Estimates from a natural experiment around the 2017 Tax Cuts and Jobs Act are consistent with the model predictions. The estimates show substitution to repurchases in higher tax states. Firms with high institutional ownership pay dividends despite high state taxation. Abnormal returns around increased dividend announcements relate positively with state tax rates after 2017, as predicted by dividend signaling models.

Keywords: JEL Classification: G35, G32 dividends, stock repurchases, taxation

JEL Classification: G35, G32