The Lock-In Effect and the Corporate Payout Puzzle

Chris Mitchell

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

Abstract: Taxes on capital gains are deferred until realization, whereas dividends are taxed upon accrual. This often makes dividends tax-disadvantaged relative to share repurchases, which leads to the payout puzzle: why do firms pay dividends? This paper demonstrates that tax deferment can also provide a solution to the payout puzzle: if shareholders demand repurchase premiums when selling equity back to a firm - as compensation for accelerated realizations - then dividends can become tax-efficient. This mechanism is appealing because it explains dividend payments without appealing to asymmetric information, incomplete contracts, repurchase constraints, or shareholder irrationality.

Date: 2019-12, Revised 2021-08
New Economics Papers: this item is included in nep-isf and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:1070r

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