Hostname: page-component-cd9895bd7-p9bg8 Total loading time: 0 Render date: 2024-12-26T19:54:46.552Z Has data issue: false hasContentIssue false
  • English
  • Français

The Effect of Shareholder Taxes on Corporate Payout Choice

Published online by Cambridge University Press:  06 April 2009

William J. Moser
Get access Rights & Permissions [Opens in a new window]

Abstract

This study investigates whether the difference in individual shareholder tax rates between dividend income and capital gain (the dividend tax penalty) affects a firm's choice between distributing funds to shareholders through dividends or share repurchases. The results of this study suggest that, in periods in which the dividend tax penalty increases, firms are more likely to distribute funds to shareholders through share repurchases as opposed to dividends. The results also indicate that the relation between the dividend tax penalty and corporate payout choice is affected by the types of shareholders who own stock in the firm. As tax-disfavored institutional ownership increases and the dividend tax penalty increases, firms are more likely to repurchase shares as opposed to distributing dividends. In contrast, as tax-favored institutional ownership increases and the dividend tax penalty increases, firms are less likely to repurchase shares as opposed to distributing dividends. As senior managerial share ownership increases and the dividend tax penalty increases, firms are more likely to make distributions to shareholders in the form of share repurchases.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 4 , December 2007 , pp. 991 - 1019
Copyright
Copyright © School of Business Administration, University of Washington 2007

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Black, F. “The Dividend Puzzle.” Journal of Portfolio Management, 2 (1976), 5–8.CrossRefGoogle Scholar
Blouin, J.; Raedy, J.; and Shackelford, D.. “Did Dividends Increase Immediately after the 2003 Reduction in Tax Rates?” Working Paper, University of North Carolina (2004).CrossRefGoogle Scholar
Brav, A.; Graham, J.; Harvey, C.; and Michaely, R.. “Payout Policy in the 21st Century.” Working Paper, Duke University (2004).Google Scholar
Cook, D.; Krigman, L.; and Leach, J.. “Corporate Repurchase Programs: Execution Strategy and the Competing Market-Maker Effect.” Working Paper, University of Colorado (1997).Google Scholar
Dann, L. “Common Stock Repurchases: An Analysis of Returns to Bondholders and Stockholders.” Journal of Financial Economics, 9 (1981), 113–138.Google Scholar
DeAngelo, H.DeAngelo, L.; Skinner, D.. “Special Dividends and the Evolution of Dividend Signaling.” Journal of Financial Economics, 57 (2000), 309–354.Google Scholar
Dhaliwal, D., and Kahle, K.. “Dividends, Ownership Structure, and Stock Options.” Working Paper, University of Arizona (2004).Google Scholar
Dhaliwal, D.; Krull, L.; Li, O.; and Moser, W.. “Dividend Taxes and Implied Cost of Equity Capital.” Journal of Accounting Research, 43 (2005), 675–708.CrossRefGoogle Scholar
Dittmar, A. “Why Do Firms Repurchase Stock?” Journal of Business, 73 (2000), 331–355.CrossRefGoogle Scholar
Fenn, G., and Liang, N.. “Corporate Payout Policy and Managerial Stock Incentives.” Journal of Financial Economics, 60 (2001), 45–72.CrossRefGoogle Scholar
Grinstein, Y., and Michaely, R.. “Institutional Holdings and Payout Policy.” Journal of Finance, 40 (2005), 1389–1426.Google Scholar
Guay, W., and Harford, J.. “The Cash-Flow Permanence and Information Content of Dividend Increases versus Repurchases.” Journal of Financial Economics, 57 (2000), 385–415.Google Scholar
Jagannathan, M.; Stephens, C.; and Weisbach, M.. “Financial Flexibility and the Choice between Dividends and Stock Repurchases.” Journal of Financial Economics, 57 (2000), 355–384.Google Scholar
Lie, E. “Financial Flexibility, Performance, and the Corporate Payout Choice.” Working Paper, College of William & Mary(2004).Google Scholar
Lie, E. “Operating Performance Following Open Market Share Repurchase Announcements.” Journal of Accounting and Economics, 39 (2005), 411–436.CrossRefGoogle Scholar
Lie, E., and Lie, H.. “The Role of Personal Taxes in Corporate Decisions: An Empirical Analysis of Share Repurchases and Dividends.” Journal of Financial and Quantitative Analysis, 34 (1999), 533–552.Google Scholar
Nam, J.; Wang, J.; and Zhang, G.. “The Impact of Dividend Tax Cut and Managerial Stock Holdings on a Firm's Dividend Policy.” Working Paper, Pace University (2004).Google Scholar
Rozeff, M. “Growth, Beta and Agency Costs as Determinants of Dividend Payout Ratios.” Journal of Financial Research, 5 (1982), 249–259.Google Scholar
Stephens, C., and Weisbach, M.. “Actual Share Reacquisitions in Open-Market Repurchase Programs.” Journal of Finance, 53 (1998), 313–333.Google Scholar
Strickland, D. “Determinants of Institutional Ownership: Implications for Dividend Clienteles.” Working Paper, Arizona State University (2002).Google Scholar
Vermaelen, T. “Common Stock Repurchases and Market Signaling: An Empirical Study.” Journal of Financial Economics, 9 (1981), 139–183.CrossRefGoogle Scholar
White, L. “Executive Compensation and Dividend Policy.” Journal of Corporate Finance, 2 (1996), 335–358.Google Scholar