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What if dividends were tax-exempt? Evidence from a natural experiment

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  • Isakov, Dusan
  • Pérignon, Christophe
  • Weisskopf, Jean-Philippe

Abstract

We study the effect of dividend taxes on the payout and investment policy of listed firms and discuss their implications for agency problems. To do so, we exploit a unique setting in Switzerland where some, but not all, firms were suddenly able to pay tax-exempted dividends to their shareholders following the corporate tax reform of 2011. Using a difference-in-differences specification, we show that treated firms increased their payout by around 30% compared to control firms after the tax cut. Differently, treated firms did not concurrently or subsequently increase investment. We show that the tax-inelasticity of investment was due to a significant drop in retained earnings ̶ as the rise in dividends was not compensated by an equally-sized reduction in share repurchases. Furthermore, treated firms did not raise more equity than control firms. Lastly, we show that an unintended consequence of cutting dividend taxes is to mitigate the agency problems that arise between insiders and minority shareholders.

Suggested Citation

  • Isakov, Dusan & Pérignon, Christophe & Weisskopf, Jean-Philippe, 2019. "What if dividends were tax-exempt? Evidence from a natural experiment," FSES Working Papers 498, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
  • Handle: RePEc:fri:fribow:fribow00498
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    Cited by:

    1. Martin Huber, 2019. "An introduction to flexible methods for policy evaluation," Papers 1910.00641, arXiv.org.

    More about this item

    Keywords

    corporate taxes; dividends; payouts; investment; agency problems.;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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