What If Dividends Were Tax‐Exempt? Evidence from a Natural Experiment

Dušan Isakov, Christophe Pérignon and Jean-Philippe Weisskopf
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Dušan Isakov: University of Fribourg
Christophe Pérignon: HEC Paris
Jean-Philippe Weisskopf: EHL Hospitality Business School

No 1381, HEC Research Papers Series from HEC Paris

Abstract: We study the effect of dividend taxes on the payout and investment policies of publicly listed firms. To do so, we exploit a unique setting in Switzerland where, following the corporate tax reform of 2011, some but not all firms were suddenly able to pay tax-exempt dividends to their shareholders. Using a difference-in-differences specification, we show that treated firms swiftly and permanently increase their dividend payout by around 30% compared to control firms after the tax cut. When studying the effect of agency conflicts, we show that the impact on the payout is less pronounced for firms in which the controlling shareholders have more voting rights than cash-flow rights. We find a significant positive abnormal stock return after the announcement of the payment of a tax-exempt dividend. However, reducing dividend taxes does not boost investment. This is due to a significant drop in retained earnings and to the fact that equity issuances do not surge after the tax cut. Our evidence is consistent with models where the marginal source of finance is retained earnings, and inconsistent with the neoclassical theory of dividend taxation.

Keywords: corporate taxes; dividends; pay-outs; investment; real effects (search for similar items in EconPapers)
JEL-codes: G35 G38 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2020-08-27
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1381

DOI: 10.2139/ssrn.3190485

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