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What do firms do when dividend tax rates change? An examination of alternative payout responses

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  • Hanlon, Michelle
  • Hoopes, Jeffrey L.

Abstract

This paper investigates whether investor-level taxes affect corporate payout policy decisions. We predict and find a surge of special dividends in the final months of 2010 and 2012, immediately before individual-level dividend tax rates were expected to increase. We also find evidence that immediately before the expected tax increases, firms altered the timing of their regular dividend payments by shifting what would normally be January regular dividend payments into the preceding December. To our knowledge this is the first evidence in the literature about changes in the timing of regular dividend payments in response to tax law changes. For both actions (specials and shifting), we find that it was more likely for a firm to respond to individual-level tax rates if insiders owned a relatively large amount of the firm. Overall, our paper provides evidence that managers consider individual-level taxes in making corporate payout decisions.

Suggested Citation

  • Hanlon, Michelle & Hoopes, Jeffrey L., 2014. "What do firms do when dividend tax rates change? An examination of alternative payout responses," Journal of Financial Economics, Elsevier, vol. 114(1), pages 105-124.
  • Handle: RePEc:eee:jfinec:v:114:y:2014:i:1:p:105-124
    DOI: 10.1016/j.jfineco.2014.06.004
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    References listed on IDEAS

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    1. Abrutyn, Stephanie & Turner, Robert W., 1990. "Taxes and Firms' Dividend Policies: Survey Results," National Tax Journal, National Tax Association;National Tax Journal, vol. 43(4), pages 491-496, December.
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    2. repec:eee:jaecon:v:64:y:2017:i:1:p:15-36 is not listed on IDEAS
    3. Dackehag, Margareta & Hansson, Åsa, 2015. "Taxation of Dividend Income and Economic Growth: The Case of Europe," Working Papers 2015:24, Lund University, Department of Economics.
    4. Peyer, Urs & Vermaelen, Theo, 2016. "Political affiliation and dividend tax avoidance: Evidence from the 2013 fiscal cliff," Journal of Empirical Finance, Elsevier, vol. 35(C), pages 136-149.
    5. Floyd, Eric & Li, Nan & Skinner, Douglas J., 2015. "Payout policy through the financial crisis: The growth of repurchases and the resilience of dividends," Journal of Financial Economics, Elsevier, vol. 118(2), pages 299-316.
    6. Buchanan, Bonnie G. & Cao, Cathy Xuying & Liljeblom, Eva & Weihrich, Susan, 2017. "Uncertainty and firm dividend policy—A natural experiment," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 179-197.
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    8. repec:eee:glofin:v:34:y:2017:i:c:p:1-15 is not listed on IDEAS
    9. repec:spr:busres:v:11:y:2018:i:1:d:10.1007_s40685-017-0054-y is not listed on IDEAS
    10. repec:spr:reaccs:v:23:y:2018:i:2:d:10.1007_s11142-018-9438-2 is not listed on IDEAS

    More about this item

    Keywords

    Dividend taxes; Payout policy; Special dividends;

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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