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

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  • JEFFREY R. BROWN
  • NELLIE LIANG
  • SCOTT WEISBENNER

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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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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Find related papers by JEL classification:
  • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
  • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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