Managerial Response to the May 2003 Dividend Tax Cut

34 Pages Posted: 23 Jan 2007

See all articles by Campbell R. Harvey

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Alon Brav

Duke University - Fuqua School of Business

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Date Written: August 9, 2007

Abstract

We survey 328 financial executives to determine the effects of the May 2003 dividend tax cut on corporate payout policy. We find that the tax cut led to initiations and dividend increases at some firms, weakly more so at firms for which retail investors are particularly important. However, financial executives say that the tax rate reduction ranks behind stability of future cash flows and cash holdings (and for firms already paying dividends, taxes also rank behind the historic level of dividends) in a list of factors that affect dividend policy. Tax effects are of roughly the same importance as attracting institutional investors and the availability of profitable investments. We also search press releases and find that the dividend tax cut is only occasionally mentioned as the reason for an initiation, especially from 2004 onward. Overall, the evidence indicates that dividend tax rates are a second-order concern in setting payout policy.

Keywords: Payout, Dividend policy, Share repurchases, Tax cut, Press Release

JEL Classification: G35, G32, G34

Suggested Citation

Harvey, Campbell R. and Brav, Alon and Graham, John Robert and Michaely, Roni, Managerial Response to the May 2003 Dividend Tax Cut (August 9, 2007). Available at SSRN: https://ssrn.com/abstract=954572 or http://dx.doi.org/10.2139/ssrn.954572

Campbell R. Harvey

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alon Brav

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-2908 (Phone)
919-684-2818 (Fax)

John Robert Graham (Contact Author)

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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