22 Pages Posted: 12 Feb 2007
This paper explores implications of differential personal taxation for corporate investment and dividend decisions. The personal tax advantage of dividend deferral causes shareholders to generally prefer greater investment in real assets under internal as opposed to external financing. Furthermore, dividend deferral is shown to be costly at the corporate level, causing shareholders in different tax brackets at times to disagree over optimal investment and dividend policies under internal financing. The profitability of internally-financed security investment is shown to depend on a security's tax status and shareholders' tax brackets. However, externally-financed security purchases are unprofitable from a tax standpoint.
Keywords: Dividends, Investment, Personal Taxation, Corporate Taxation, Internal Financing, External Financing, Tax Brackets, Taxes, Shareholder Conflicts of Interest
JEL Classification: D23, G31, G35, H23, H24, H25
Suggested Citation: Suggested Citation
Trueman, Brett and Masulis, Ronald W., Corporate Investment and Dividend Decisions Under Differential Personal Taxation. Journal of Financial and Quantitative Analysis, Vol. 23, No. 4, 1998. Available at SSRN: https://ssrn.com/abstract=962143