Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut

44 Pages Posted: 20 Jul 2006 Last revised: 26 Jul 2010

See all articles by Jeffrey R. Brown

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Nellie Liang

Brookings Institution

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2004

Abstract

We test whether executive stock ownership affects firm payouts using the 2003 dividend tax cut to identify an exogenous change in the after-tax value of dividends. We find that executives with higher stock ownership were more likely to increase dividends after the tax cut in 2003, whereas no relation is found in previous periods when the dividend tax rate was higher. Relative to previous years, firms that initiated dividends in 2003 were more likely to reduce repurchases. The stock price reaction to the tax cut suggests that the substitution of dividends for repurchases may have been anticipated, consistent with agency conflicts.

Suggested Citation

Brown, Jeffrey R. and Liang, Nellie and Weisbenner, Scott J., Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut (December 2004). NBER Working Paper No. w11002, Available at SSRN: https://ssrn.com/abstract=637499

Jeffrey R. Brown (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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University of Illinois College of Law ( email )

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Nellie Liang

Brookings Institution

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Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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