This paper offers a new explanation of the dividend pizzle, based upon a model in which firms attempt to signal profitability by distrbuting cash to shareholders. I assume that dividends and repurchases are identical, except that dividends are taxed more heavily. Nevertheless, I demonstrate that, under certain plausible conditions, corporations will pay dividends. Indeed, some firms will actually pay dividends, and then retrieve a portion of these payments by issuing new equity (perhaps through a dividend reinvestment plan), despite the fact that this appears to create gratuitous tax liabilities. In addition to providing an explanation for the dividend puzzle, I also derive a number of strong results concerning corporate payout decisions and government tax policy. Some of these results are surprising. For example, the relationship between repurchases and firm quality is hump-shaped. Moreover, despite the fact that a higher dividend tax rate depresses dividend payments, it does not affect either government revenue or welfare.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
3434.
Length: Date of creation: Sep 1990 Date of revision: Handle: RePEc:nbr:nberwo:3434
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Roger Gordon & Martin Dietz, 2006.
"Dividends and Taxes,"
NBER Working Papers
12292, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Bernhardt, Dan & Robertson, Fiona J., 1993.
"Testing Dividend Signalling Models,"
Working Papers
828, California Institute of Technology, Division of the Humanities and Social Sciences.
[Downloadable!]
Other versions:
Bechman, Ken L. & Raaballe, Johannes, 2006.
"Taxable Cash Dividends,"
Working Papers
2005-4, Copenhagen Business School, Department of Finance.
[Downloadable!]
Arturo, Ramirez Verdugo, 2004.
"Dividend Signaling and Unions,"
MPRA Paper
2273, University Library of Munich, Germany, revised 04 Oct 2006.
[Downloadable!]