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

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Author Info
JEFFREY R. BROWN
NELLIE LIANG
SCOTT WEISBENNER

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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 ownership were more likely to increase dividends after the tax cut in 2003, whereas no relation is found in 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. Copyright 2007 by The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2007.01261.x
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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 62 (2007)
Issue (Month): 4 (08)
Pages: 1935-1965
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Handle: RePEc:bla:jfinan:v:62:y:2007:i:4:p:1935-1965

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Christine Jolls, 1998. "Stock Repurchases and Incentive Compensation," NBER Working Papers 6467, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Lambert, Richard A. & Lanen, William N. & Larcker, David F., 1989. "Executive Stock Option Plans and Corporate Dividend Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(04), pages 409-425, December. [Downloadable!]
  3. James Poterba, 2004. "Taxation and Corporate Payout Policy," NBER Working Papers 10321, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 653-691, August. [Downloadable!] (restricted)
    Other versions:
  5. George P. Baker & Brian J. Hall, 2004. "CEO Incentives and Firm Size," Journal of Labor Economics, University of Chicago Press, vol. 22(4), pages 767-798, October. [Downloadable!]
  6. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May. [Downloadable!] (restricted)
  7. Jagannathan, Murali & Stephens, Clifford P. & Weisbach, Michael S., 2000. "Financial flexibility and the choice between dividends and stock repurchases," Journal of Financial Economics, Elsevier, vol. 57(3), pages 355-384, September. [Downloadable!] (restricted)
  8. Dittmar, Amy K, 2000. "Why Do Firms Repurchase Stock?," Journal of Business, University of Chicago Press, vol. 73(3), pages 331-55, July. [Downloadable!] (restricted)
  9. Gustavo Grullon & Roni Michaely, 2002. "Dividends, Share Repurchases, and the Substitution Hypothesis," Journal of Finance, American Finance Association, vol. 57(4), pages 1649-1684, 08. [Downloadable!] (restricted)
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  11. Bettis, J. Carr & Bizjak, John M. & Lemmon, Michael L., 2001. "Managerial Ownership, Incentive Contracting, and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(03), pages 345-370, September. [Downloadable!]
  12. James, Christopher, 1983. "An analysis of intra-industry differences in the effect of regulation : The case of deposit rate ceilings," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 417-432, September. [Downloadable!] (restricted)
  13. Jeffrey R. Brown & J. David Cummins & Christopher M. Lewis & Ran Wei, 2004. "An Empirical Analysis of the Economic Impact of Federal Terrorism Reinsurance," NBER Working Papers 10388, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Fenn, George W. & Liang, Nellie, 2001. "Corporate payout policy and managerial stock incentives," Journal of Financial Economics, Elsevier, vol. 60(1), pages 45-72, April. [Downloadable!] (restricted)
  15. Brav, Alon & Graham, John R. & Harvey, Campbell R. & Michaely, Roni, 2005. "Payout policy in the 21st century," Journal of Financial Economics, Elsevier, vol. 77(3), pages 483-527, September. [Downloadable!] (restricted)
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  16. Gene Amromin & Paul Harrison & Steven Sharpe, 2005. "How did the 2003 dividend tax cut affect stock prices?," Finance and Economics Discussion Series 2005-61, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  17. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, 08. [Downloadable!] (restricted)
  18. Glenn W. Boyle & Graeme A. Guthrie, 2003. "Investment, Uncertainty, and Liquidity," Journal of Finance, American Finance Association, vol. 58(5), pages 2143-2166, October. [Downloadable!] (restricted)
  19. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance And Equity Prices," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 107-155, February. [Downloadable!] (restricted)
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  20. Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December. [Downloadable!] (restricted)
  21. Franklin Allen & Roni Michaely, 2002. "Payout Policy," Center for Financial Institutions Working Papers 01-21, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
    • Allen, Franklin & Michaely, Roni, 2003. "Payout policy," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 7, pages 337-429 Elsevier. [Downloadable!] (restricted)
  22. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier. [Downloadable!] (restricted)
  23. Shefrin, Hersh M. & Statman, Meir, 1984. "Explaining investor preference for cash dividends," Journal of Financial Economics, Elsevier, vol. 13(2), pages 253-282, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Seppo Kari & Hanna Karikallio & Pirttilä & Jukka, 2008. "Anticipating Tax Changes: Evidence from the Finnish Corporate Income Tax Reform of 2005," Discussion Papers 447, Government Institute for Economic Research Finland (VATT). [Downloadable!]
    Other versions:
  2. Roger Gordon & Martin Dietz, 2006. "Dividends and Taxes," NBER Working Papers 12292, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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