Cutting the Dividends Tax…and Corporate Governance Too?

Dino Falaschetti and Michael J. Orlando ()

Abstract: Economists tend to agree that the recent cutting of dividends taxes will encourage investment and reduce financial distress. In addition to creating these “benefits,” however, the tax cut can also increase governance costs. For example, by removing a bias for leveraged capital structures, the tax cut foregoes debt’s superiority on at least three dimensions: 1. Evaluating and monitoring demanders of financial capital; 2. Constraining managerial agents’ from opportunistically employing capital market proceeds; and 3. Encouraging non-financial stakeholders (e.g., employees, suppliers) to make firm-specific investments. Moreover, because these privately produced services contribute to the integrity of broader financial markets (i.e., a public good), competitive forces may not fully counter the tax cut’s governance consequences.

Keywords: Dividends Tax; Corporate Governance (search for similar items in EconPapers)
JEL-codes: G32 G38 H25 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-pbe
Date: Written 2003-11-19
Note: Type of Document - pdf; prepared on WinXP; pages: 13
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