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Dividends and Taxes

  • Roger Gordon
  • Martin Dietz

How do dividend taxes affect firm behavior and what are their distributional and efficiency effects? To answer these questions, the first problem is coming up with an explanation for why firms pay dividends, in spite of their tax penalty. This paper surveys three different models for why firms pay dividends, and then uses each model to examine the behavioral and efficiency effects of dividend taxes. The three models examined are: the %u201Cnew view,%u201D an agency cost explanation, and a signaling model. While all three models forecast dividends, their forecasts regarding other firm behavior, and their forecasts for the efficiency and distributional effects of a dividend tax, often differ. Given the evidence to date, we find the agency model is the one most consistent with the data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12292.

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Date of creation: Jun 2006
Date of revision:
Publication status: published as Auerbach, Alan J. and Daniel N. Shaviro. Institutional Foundations of Public Finance: Economic and Legal Perspectives. Cambridge and London: Harvard University Press, 2008.
Handle: RePEc:nbr:nberwo:12292
Note: CF PE
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  9. Gordon, Roger H. & Bradford, David F., 1980. "Taxation and the stock market valuation of capital gains and dividends : Theory and emphirical results," Journal of Public Economics, Elsevier, vol. 14(2), pages 109-136, October.
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  20. Bernheim, B Douglas & Wantz, Adam, 1995. "A Tax-Based Test of the Dividend Signaling Hypothesis," American Economic Review, American Economic Association, vol. 85(3), pages 532-51, June.
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  23. Jeffrey R. Brown & Nellie Liang & Scott Weisbenner, 2004. "Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut," NBER Working Papers 11002, National Bureau of Economic Research, Inc.
  24. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
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  27. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
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