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Payout Taxes and the Allocation of Investment

  • Bo Becker
  • Marcus Jacob
  • Martin Jacob

When corporate payout is taxed, internal equity (retained earnings) is cheaper than external equity (share issues). High taxes will favor firms who can finance internally. If there are no perfect substitutes for equity finance, payout taxes may thus change the investment behavior of firms. Using an international panel with many changes in payout taxes, we show that this prediction holds well. Payout taxes have a large impact on the dynamics of corporate investment and growth. Investment is "locked in" in profitable firms when payout is heavily taxed. Thus, apart from any aggregate effects, payout taxes change the allocation of capital.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17481.

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Date of creation: Oct 2011
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Publication status: published as Becker, Bo & Jacob, Marcus & Jacob, Martin, 2013. "Payout taxes and the allocation of investment," Journal of Financial Economics, Elsevier, vol. 107(1), pages 1-24.
Handle: RePEc:nbr:nberwo:17481
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