Payout Policy and Tax Deferral

Harry DeAngelo

Journal of Finance, 1991, vol. 46, issue 1, 357-68

Abstract: Equilibrium in the standard finance model implies that value-maximizing firms make taxable equity payouts, even when deferral effectively allows complete tax escape. Since tax deferral and consumption deferral are inherently jointly supplied goods, an excess aggregate supply of future consumption would result if firms followed conventional wisdom and adopted low or zero payout policies to capture tax deferral benefits. The market provides incentives for firms to supply both taxable payouts and capital gains by overriding any tax deferral advantage, just as it provided incentives for equity financing by overriding the corporate tax advantage of debt in "Debt and Taxes." Copyright 1991 by American Finance Association.

Date: 1991
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