Dividend taxes and investment efficiency: Evidence from the 2003 U.S. personal taxation reform

J.B. Chay, Byung-Uk Chong and Hyun Joong Im

Journal of Accounting and Economics, 2023, vol. 75, issue 1

Abstract: We examine the effect of a large dividend tax cut on corporate investment efficiency by exploiting the 2003 personal taxation reform in the U.S. as a quasi-natural experiment. Using a difference-in-differences approach based on the probability that a firm’s marginal investor was an individual investor, we show that the 2003 dividend tax cut significantly improved the investment efficiency of U.S. listed firms. However, we find no evidence that the dividend tax cut increased the level of investment of U.S. listed firms. Further, we show that the tax cut increased investment efficiency by mitigating agency problems associated with the excessive free cash flows of overinvesting firms and by relaxing the financial constraints of underinvesting firms.

Keywords: Dividend taxation; Investment efficiency; Financial constraints; Agency conflicts (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 G31 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:75:y:2023:i:1:s0165410122000374

DOI: 10.1016/j.jacceco.2022.101514

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