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The Lock-In Effect and the Corporate Payout Puzzle

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  • Chris Mitchell

Abstract

Taxes on capital gains are deferred until realization, whereas dividends are taxed upon accrual. This often makes dividends tax-disadvantaged relative to share repurchases, which leads to the payout puzzle: why do firms pay dividends? This paper demonstrates that tax deferment can also provide a solution to the payout puzzle: if shareholders demand repurchase premiums when selling equity back to a firm - as compensation for accelerated realizations - then dividends can become tax-efficient. This mechanism is appealing because it explains dividend payments without appealing to asymmetric information, incomplete contracts, repurchase constraints, or shareholder irrationality.

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  • Chris Mitchell, 2019. "The Lock-In Effect and the Corporate Payout Puzzle," ISER Discussion Paper 1070r, Institute of Social and Economic Research, Osaka University, revised Aug 2021.
    • Handle: RePEc:dpr:wpaper:1070r
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    File URL: https://www.iser.osaka-u.ac.jp/library/dp/2019/DP1070R.pdf
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