Do Taxes Impact Payout? Evidence from the First Direct Tax on Repurchases
64 Pages Posted:
Date Written: March 18, 2024
Abstract
This paper studies the impact of taxes on payout by exploring firms' response to an unprecedented 1% excise tax on stock repurchases. Using monthly hand-collected data, we find that firms decrease repurchases by 5%-10% post-tax, with a more pronounced decline for firms most affected by the tax. Contemporaneous dividend increases fail to offset repurchase cuts, leading to a drop in total payouts. Investment and employment remain largely unchanged; instead, affected firms increase cash holdings. Our findings suggest taxes become a first-order consideration in payout policy when firms must internalize an easily quantifiable tax on a more flexible form of payout.
Keywords: Payout policy, share repurchases, buybacks, excise tax, dividends
JEL Classification: G14, G35, M12, M52
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