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Tax Costs and Signalling Benefits: The Impact of Surplus ACT

Lynn Hodgkinson

Journal of Business Finance & Accounting, 2002, vol. 29, issue 3‐4, 411-428

Abstract: Companies with surplus ACT are faced with additional tax costs if they use dividends to signal information to investors, hence there is a trade‐off between tax costs and signalling benefits. This paper provides evidence that investors' reactions to dividend surprises are influenced by the signal generated by earnings and tax planning considerations. The results indicate that in the presence of a positive earnings signal and a binding tax constraint, decreases in dividends are value enhancing.

Date: 2002
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