The Lock-In Effect and the Corporate Payout Puzzle
ISER Discussion Paper from Institute of Social and Economic Research, Osaka University
Taxes on capital gains are deferred until realization, whereas dividends are taxed upon accrual. This often makes dividends tax-disadvantaged relative to share repurchases, which leads to the payout puzzle: why do firms pay dividends? This paper demonstrates that tax deferment can also provide a solution to the payout puzzle: if shareholders demand repurchase premiums when selling equity back to a firm - as compensation for accelerated realizations - then dividends can become tax-efficient. This mechanism is appealing because it explains dividend payments without appealing to asymmetric information, incomplete contracts, repurchase constraints, or shareholder irrationality.
Date: 2019-12, Revised 2021-08
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:1070r
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