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Announcement Effect of Dividend in Presence of Dividend Tax: Possible Agency Problem and Macro Level Inefficiency?

Author

Listed:
  • Debabrata Datta

    (Debabrata Datta, Institute of Management Technology, Ghaziabad, UP. E-mail: d.debabrata@gmail.com)

  • Santanu K. Ganguli

    (Santanu K. Ganguli, International Management Institute, Bhubaneshwar, Odisha. E-mail: skganguli@rediffmail.com)

  • Manu Chaturvedi

    (Manu Chaturvedi, Institute of Management Technology, Ghaziabad.)

Abstract

This article evaluates the efficiency of existing dividend distribution tax in India from the perspective of investors’ preference pattern, as revealed in the market. It investigates the announcement effect of dividend in India in the presence of dividend distribution tax with specific legislative intent of discouraging dividend distribution. Using data on large profitable firms, we show that despite firm-level tax, higher dividend payout announcement leads to significant rise in share price. This implies that despite being tax-disadvantaged, investors of large profitable firms prefer higher payout, because it mitigates agency cost of retention. This shows that dividend distribution tax is inefficient. JEL Classification: G32, G35

Suggested Citation

  • Debabrata Datta & Santanu K. Ganguli & Manu Chaturvedi, 2014. "Announcement Effect of Dividend in Presence of Dividend Tax: Possible Agency Problem and Macro Level Inefficiency?," South Asian Journal of Macroeconomics and Public Finance, , vol. 3(2), pages 195-220, December.
    • Handle: RePEc:sae:smppub:v:3:y:2014:i:2:p:195-220
    DOI: 10.1177/2277978714548634
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    References listed on IDEAS

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    2. Olarewaju Odunayo Magret & Migiro Stephen Oseko & Sibanda Mabutho, 2018. "Dividend Payout, Retention Policy and Financial Performance in Commercial Banks: Any Causal Relationship?," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 63(1), pages 37-62, April.

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    More about this item

    Keywords

    Dividend announcement; agency theory; dividend distribution tax; stock price movement;
    All these keywords.

    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

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