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Free Cash Flow, Shareholder Value, and the Undistributed Profits Tax of 1936 and 1937

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  • Christie, William G
  • Nanda, Vikram

Abstract

In 1936, the federal government unexpectedly imposed a tax on undistributed corporate profits. Despite the direct costs of the tax, its announcement produced a positive revaluation of corporate equity, particularly among lower-payout firms. The authors interpret this as evidence of a divergence between managerial and shareholder preferences regarding dividend payout policies, consistent with the presence of agency costs. They also find that, despite the incentives created by the tax, the actual growth in dividends during 1936 was lower among firms judged more likely to be subject to higher agency costs after controlling for liquidity, debt, and the growth in earnings. Copyright 1994 by American Finance Association.

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  • Christie, William G & Nanda, Vikram, 1994. "Free Cash Flow, Shareholder Value, and the Undistributed Profits Tax of 1936 and 1937," Journal of Finance, American Finance Association, vol. 49(5), pages 1727-1754, December.
    • Handle: RePEc:bla:jfinan:v:49:y:1994:i:5:p:1727-54
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    Cited by:

    1. Erin E. Syron Ferris, 2015. "Dividend Taxes and Stock Volatility," Finance and Economics Discussion Series 2015-36, Board of Governors of the Federal Reserve System (U.S.).
    2. Desai, Mihir A. & Dyck, Alexander & Zingales, Luigi, 2007. "Theft and taxes," Journal of Financial Economics, Elsevier, vol. 84(3), pages 591-623, June.
    3. Raj Chetty & Emmanuel Saez, 2010. "Dividend and Corporate Taxation in an Agency Model of the Firm," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 1-31, August.
    4. Robert Rieg, 2015. "Dynamics of value-based management: does shareholder value cause short-termism?," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(2), pages 193-224, August.
    5. John R. Graham & Sonali Hazarika & Krishnamoorthy Narasimhan, 2011. "Financial Distress in the Great Depression," NBER Working Papers 17388, National Bureau of Economic Research, Inc.
    6. Desai, Mihir A. & Dyck, Alexander & Gonzales, Luigi, 2006. "Theft and Taxes," Working Papers 207, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    7. Aivazian, Varouj & Booth, Laurence & Cleary, Sean, 2003. "Dividend policy and the organization of capital markets," Journal of Multinational Financial Management, Elsevier, vol. 13(2), pages 101-121, April.
    8. Pennings, Joost M. E., 2004. "A marketing-finance approach towards industrial channel contract relationships: a model and application," Journal of Business Research, Elsevier, vol. 57(6), pages 601-609, June.
    9. Erin E. Syron Ferris, 2018. "Dividend taxes and stock volatility," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(2), pages 377-403, April.
    10. Christian Keuschnigg & Evelyn Ribi, 2010. "Business Taxation, Corporate Finance and Economic Performance," University of St. Gallen Department of Economics working paper series 2010 2010-04, Department of Economics, University of St. Gallen.

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