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Does dividend tax impede competition for corporate charters?

Tat-kei Lai () and Travis Ng ()

Journal of Comparative Economics, 2017, vol. 45, issue 4, 751-772

Abstract: We develop a model of jurisdictional competition for corporate charters among the states in which a firm’s agency cost depends on the federal dividend income tax rate and the takeover regulations of its domicile state. When firms are mobile across states, the federal dividend income tax rate affects both the intensity of competition among the states and the equilibrium level of state takeover regulations. Our model shows that increasing dividend tax rate weakens the competition for corporate charters under a condition: dividend-paying and the market for corporate control are complementary corporate governance mechanisms. This condition holds empirically, suggesting that dividend tax not only discourages firms from paying dividends but also weakens their corporate governance by disincentivizing states to improve their corporate laws.

Keywords: Jurisdictional competition; Corporate charters; Takeover regulations; Corporate law; Corporate federalism; Tax law; Corporate governance; Agency costs; Dividend taxation; Dividend payment; Investment (search for similar items in EconPapers)
JEL-codes: G31 G34 G35 H32 K34 K22 K33 (search for similar items in EconPapers)
Date: 2017
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