1. What If Dividends Were Tax‐Exempt? Evidence from a Natural Experiment
- Author
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Christophe Pérignon, Jean-Philippe Weisskopf, Dušan Isakov, Ecole des Hautes Etudes Commerciales (HEC Paris), and HEC Paris Research Paper Series
- Subjects
JEL: G - Financial Economics/G.G3 - Corporate Finance and Governance/G.G3.G35 - Payout Policy ,050208 finance ,Natural experiment ,Retained earnings ,05 social sciences ,Dividend payout ratio ,Equity (finance) ,investment ,pay-outs ,Monetary economics ,JEL: G - Financial Economics/G.G3 - Corporate Finance and Governance/G.G3.G38 - Government Policy and Regulation ,Dividend tax ,corporate taxes ,Shareholder ,0502 economics and business ,8. Economic growth ,Economics ,real effects ,[SHS.GESTION]Humanities and Social Sciences/Business administration ,Dividend ,050207 economics ,dividends ,Corporate tax - Abstract
We study the effect of dividend taxes on the payout and investment policies of publicly listed firms. To do so, we exploit a unique setting in Switzerland where, following the corporate tax reform of 2011, some but not all firms were suddenly able to pay tax-exempt dividends to their shareholders. Using a difference-in-differences specification, we show that treated firms swiftly and permanently increase their dividend payout by around 30% compared to control firms after the tax cut. When studying the effect of agency conflicts, we show that the impact on the payout is less pronounced for firms in which the controlling shareholders have more voting rights than cash-flow rights. We find a significant positive abnormal stock return after the announcement of the payment of a tax-exempt dividend. However, reducing dividend taxes does not boost investment. This is due to a significant drop in retained earnings and to the fact that equity issuances do not surge after the tax cut. Our evidence is consistent with models where the marginal source of finance is retained earnings, and inconsistent with the neoclassical theory of dividend taxation.
- Published
- 2018