What if dividends were tax-exempt? Evidence from a natural experiment

Dusan Isakov, Christophe Perignon () and Jean-Philippe Weisskopf

No 498, FSES Working Papers from Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland

Abstract: We study the effect of dividend taxes on the payout and investment policy of listed firms and discuss their implications for agency problems. To do so, we exploit a unique setting in Switzerland where some, but not all, firms were suddenly able to pay tax-exempted dividends to their shareholders following the corporate tax reform of 2011. Using a difference-in-differences specification, we show that treated firms increased their payout by around 30% compared to control firms after the tax cut. Differently, treated firms did not concurrently or subsequently increase investment. We show that the tax-inelasticity of investment was due to a significant drop in retained earnings ̶ as the rise in dividends was not compensated by an equally-sized reduction in share repurchases. Furthermore, treated firms did not raise more equity than control firms. Lastly, we show that an unintended consequence of cutting dividend taxes is to mitigate the agency problems that arise between insiders and minority shareholders.

Keywords: corporate taxes; dividends; payouts; investment; agency problems. (search for similar items in EconPapers)
JEL-codes: G35 G38 H25 K34 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2019-02-19
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-eur, nep-law and nep-pbe
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: What If Dividends Were Tax-Exempt? Evidence from a Natural Experiment (2021)
Working Paper: What If Dividends Were Tax‐Exempt? Evidence from a Natural Experiment (2020)
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