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Dividend Policy inside the Firm

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  • Mihir A. Desai
  • C. Fritz Foley
  • James R. Hines Jr.

Abstract

This paper analyzes dividend remittances by a large panel of foreign affiliates of U.S. multinational firms. The dividend policies of foreign affiliates, which convey no signals to public capital markets, nevertheless resemble those used by publicly held companies in paying dividends to diffuse common shareholders. Robustness checks verify that dividend policies of foreign affiliates are little affected by the dividend policies of their parent companies or parent company exposure to public capital markets. Systematic differences in the payout behavior of affiliates that differ in organizational form, and those that face differing tax costs of paying dividends, reveal the importance of tax factors; nevertheless, dividend policies are not solely determined by tax considerations. The absence of capital market considerations and the incompleteness of tax explanations together suggest that dividend policies are largely driven by the need to control managers of foreign affiliates. Parent firms are more willing to incur tax penalties by simultaneously investing funds while receiving dividends when their foreign affiliates are partially owned, located far from the United States, or in jurisdictions in which property rights are weak, all of which are implied by control theories of dividends.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8698.

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Date of creation: Jan 2002
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Publication status: published as Desai, Mihir A., C. Fritz Folley and James R. Hines Jr. “Dividend Policy Inside the Multinational Firm." Financial Management 36, 1 (2007): 5-26.
Handle: RePEc:nbr:nberwo:8698

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Citations

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Cited by:
  1. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2002. "Chains of Ownership, Regional Tax Competition, and Foreign Direct Investment," NBER Working Papers 9224, National Bureau of Economic Research, Inc.
  2. Raj Chetty & Emmanuel Saez, 2007. "An Agency Theory of Dividend Taxation," NBER Working Papers 13538, National Bureau of Economic Research, Inc.
  3. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2004. "Capital Controls, Liberalizations, and Foreign Direct Investement," NBER Working Papers 10337, National Bureau of Economic Research, Inc.
  4. Michael Faulkender & Mitchell Petersen, 2009. "Investment and Capital Constraints: Repatriations Under the American Jobs Creation Act," NBER Working Papers 15248, National Bureau of Economic Research, Inc.
  5. Mihir A. Desai & James R. Hines Jr., 2001. "Foreign Direct Investment in a World of Multiple Taxes," NBER Working Papers 8440, National Bureau of Economic Research, Inc.
  6. Fritz Foley, C. & Hartzell, Jay C. & Titman, Sheridan & Twite, Garry, 2007. "Why do firms hold so much cash? A tax-based explanation," Journal of Financial Economics, Elsevier, vol. 86(3), pages 579-607, December.
  7. Selin Sayek & Alexander Lehmann & Hyoung Goo Kang, 2004. "Multinational Affiliates and Local Financial Markets," IMF Working Papers 04/107, International Monetary Fund.
  8. Jan Bena & Jan Hanousek, 2008. "Rent Extraction by Large Shareholders: Evidence Using Dividend Policy in the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(03-04), pages 106-130, May.
  9. Randall Morck & Bernard Yeung, 2005. "Dividend Taxation and Corporate Governance," Journal of Economic Perspectives, American Economic Association, vol. 19(3), pages 163-180, Summer.
  10. I.M. Pandey & Ramesh Bhat, 2007. "Dividend behaviour of Indian companies under monetary policy restrictions," Managerial Finance, Emerald Group Publishing, vol. 33(1), pages 14-25.

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