IDEAS home Printed from https://ideas.repec.org/a/bla/finmgt/v51y2022i2p539-571.html
   My bibliography  Save this article

Does dividend policy affect sales growth in product markets? Evidence from the 2003 dividend tax cut

Author

Listed:
  • Atsushi Chino
  • Joon Ho Kim

Abstract

We examine the effect of firms’ dividend policy on product market outcomes. Exploiting the 2003 dividend tax cut as the exogenous increase in demand for dividends from tax‐sensitive shareholders, we show that firms that raised dividends in response to the tax cut recorded lower sales growth in product markets after the tax cut. These firms experienced a reduction in financial flexibility, which led to a decrease in investment activities. Despite the negative effects of dividends on sales growth, firm value increased on average, indicating that the firms raised dividends when the shareholder benefits outweighed the costs.

Suggested Citation

  • Atsushi Chino & Joon Ho Kim, 2022. "Does dividend policy affect sales growth in product markets? Evidence from the 2003 dividend tax cut," Financial Management, Financial Management Association International, vol. 51(2), pages 539-571, June.
    • Handle: RePEc:bla:finmgt:v:51:y:2022:i:2:p:539-571
    DOI: 10.1111/fima.12376
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/fima.12376
    Download Restriction: no
    File URL: https://libkey.io/10.1111/fima.12376?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Chevalier, Judith A, 1995. "Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
    2. Adrien Matray & Charles Boissel, 2020. "Higher Dividend Taxes, No Problem! Evidence from Taxing Entrepreneurs in France," Working Papers 276, Princeton University, Department of Economics, Center for Economic Policy Studies..
    3. David J. Denis & Valeriy Sibilkov, 2010. "Financial Constraints, Investment, and the Value of Cash Holdings," The Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 247-269, January.
    4. Eugene F. Fama & Kenneth R. French, 2001. "Disappearing Dividends: Changing Firm Characteristics Or Lower Propensity To Pay?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(1), pages 67-79, March.
    5. Laurent Fresard, 2010. "Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings," Journal of Finance, American Finance Association, vol. 65(3), pages 1097-1122, June.
    6. Raj Chetty & Emmanuel Saez, 2005. "Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 791-833.
    7. repec:bla:jfinan:v:59:y:2004:i:5:p:2093-2116 is not listed on IDEAS
    8. DeAngelo, Harry & DeAngelo, Linda & Skinner, Douglas J., 2009. "Corporate Payout Policy," Foundations and Trends(R) in Finance, now publishers, vol. 3(2–3), pages 95-287, April.
    9. Chen, Kevin C. W. & Chen, Zhihong & Wei, K. C. John, 2011. "Agency Costs of Free Cash Flow and the Effect of Shareholder Rights on the Implied Cost of Equity Capital," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(1), pages 171-207, February.
    10. Gene Amromin & Paul Harrison & Steven Sharpe, 2008. "How Did the 2003 Dividend Tax Cut Affect Stock Prices?," Financial Management, Financial Management Association International, vol. 37(4), pages 625-646, December.
    11. Gerard Hoberg & Gordon Phillips & Nagpurnanand Prabhala, 2014. "Product Market Threats, Payouts, and Financial Flexibility," Journal of Finance, American Finance Association, vol. 69(1), pages 293-324, February.
    12. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
    13. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    14. Korinek, Anton & Stiglitz, Joseph E., 2009. "Dividend taxation and intertemporal tax arbitrage," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 142-159, February.
    15. Andrea Gamba & Alexander Triantis, 2008. "The Value of Financial Flexibility," Journal of Finance, American Finance Association, vol. 63(5), pages 2263-2296, October.
    16. Kovenock, Dan & Phillips, Gordon M, 1997. "Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 767-803.
    17. Marianne Bertrand & Sendhil Mullainathan, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1043-1075, October.
    18. Healy, Paul M. & Palepu, Krishna G., 1988. "Earnings information conveyed by dividend initiations and omissions," Journal of Financial Economics, Elsevier, vol. 21(2), pages 149-175, September.
    19. Denis, David J., 2011. "Financial flexibility and corporate liquidity," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 667-674, June.
    20. Doron Nissim & Amir Ziv, 2001. "Dividend Changes and Future Profitability," Journal of Finance, American Finance Association, vol. 56(6), pages 2111-2133, December.
    21. Brav, Alon & Graham, John R. & Harvey, Campbell R. & Michaely, Roni, 2005. "Payout policy in the 21st century," Journal of Financial Economics, Elsevier, vol. 77(3), pages 483-527, September.
    22. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    23. Patrick Bolton & Hui Chen & Neng Wang, 2011. "A Unified Theory of Tobin's q, Corporate Investment, Financing, and Risk Management," Journal of Finance, American Finance Association, vol. 66(5), pages 1545-1578, October.
    24. Leigh A. Riddick & Toni M. Whited, 2009. "The Corporate Propensity to Save," Journal of Finance, American Finance Association, vol. 64(4), pages 1729-1766, August.
    25. Danny Yagan, 2015. "Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut," American Economic Review, American Economic Association, vol. 105(12), pages 3531-3563, December.
    26. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    27. Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(3), pages 335-359, September.
    28. Poterba, James M. & Summers, Lawrence H., 1983. "Dividend taxes, corporate investment, and `Q'," Journal of Public Economics, Elsevier, vol. 22(2), pages 135-167, November.
    29. Joan Farre-Mensa & Alexander Ljungqvist, 2016. "Do Measures of Financial Constraints Measure Financial Constraints?," The Review of Financial Studies, Society for Financial Studies, vol. 29(2), pages 271-308.
    30. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
    31. M. J. Gordon, 1963. "Optimal Investment And Financing Policy," Journal of Finance, American Finance Association, vol. 18(2), pages 264-272, May.
    32. Chen, Kevin C.W. & Chen, Zhihong & Wei, K.C. John, 2009. "Legal protection of investors, corporate governance, and the cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 273-289, June.
    33. Blau, Benjamin M. & Fuller, Kathleen P., 2008. "Flexibility and dividends," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 133-152, April.
    34. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February.
    35. Jeffrey R. Brown & Nellie Liang & Scott Weisbenner, 2007. "Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut," Journal of Finance, American Finance Association, vol. 62(4), pages 1935-1965, August.
    36. Dhaliwal, Dan & Krull, Linda & Li, Oliver Zhen, 2007. "Did the 2003 Tax Act reduce the cost of equity capital?," Journal of Accounting and Economics, Elsevier, vol. 43(1), pages 121-150, March.
    37. Raj Chetty & Emmanuel Saez, 2010. "Dividend and Corporate Taxation in an Agency Model of the Firm," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 1-31, August.
    38. James Poterba, 2004. "Taxation and Corporate Payout Policy," American Economic Review, American Economic Association, vol. 94(2), pages 171-175, May.
    39. Benartzi, Shlomo & Michaely, Roni & Thaler, Richard H, 1997. "Do Changes in Dividends Signal the Future or the Past?," Journal of Finance, American Finance Association, vol. 52(3), pages 1007-1034, July.
    40. DeAngelo, Harry & DeAngelo, Linda & Whited, Toni M., 2011. "Capital structure dynamics and transitory debt," Journal of Financial Economics, Elsevier, vol. 99(2), pages 235-261, February.
    41. Laurent Fresard, 2010. "Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings," Post-Print hal-00537081, HAL.
    42. Alice Adams Bonaimé & Kristine Watson Hankins & Jarrad Harford, 2014. "Financial Flexibility, Risk Management, and Payout Choice," The Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 1074-1101.
    43. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    44. Haushalter, David & Klasa, Sandy & Maxwell, William F., 2007. "The influence of product market dynamics on a firm's cash holdings and hedging behavior," Journal of Financial Economics, Elsevier, vol. 84(3), pages 797-825, June.
    45. Han, Seungjin & Qiu, Jiaping, 2007. "Corporate precautionary cash holdings," Journal of Corporate Finance, Elsevier, vol. 13(1), pages 43-57, March.
    46. Cookson, J. Anthony, 2017. "Leverage and strategic preemption: Lessons from entry plans and incumbent investments," Journal of Financial Economics, Elsevier, vol. 123(2), pages 292-312.
    47. David J. Denis & Stephen B. McKeon, 2012. "Debt Financing and Financial Flexibility Evidence from Proactive Leverage Increases," The Review of Financial Studies, Society for Financial Studies, vol. 25(6), pages 1897-1929.
    48. Elena Simintzi & Vikrant Vig & Paolo Volpin, 2015. "Labor Protection and Leverage," The Review of Financial Studies, Society for Financial Studies, vol. 28(2), pages 561-591.
    49. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2013. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, volume 2, number 2-b, March.
    50. repec:bla:jfinan:v:59:y:2004:i:4:p:1777-1804 is not listed on IDEAS
    51. Campello, Murillo, 2006. "Debt financing: Does it boost or hurt firm performance in product markets?," Journal of Financial Economics, Elsevier, vol. 82(1), pages 135-172, October.
    52. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2013. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, volume 2, number 2-a, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ma, Liang & Mello, Antonio S. & Wu, Youchang, 2020. "First-mover advantage, time to finance, and cash holdings," Journal of Corporate Finance, Elsevier, vol. 62(C).
    2. Heitor Almeida & Murillo Campello & Igor Cunha & Michael S. Weisbach, 2014. "Corporate Liquidity Management: A Conceptual Framework and Survey," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 135-162, December.
    3. Sertsios, Giorgo, 2020. "Corporate finance, industrial organization, and organizational economics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    4. Beuselinck, Christof & Markarian, Garen & Verriest, Arnt, 2021. "Employee protection shocks and corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 69(C).
    5. Gbenga Adamolekun & Edward Jones & Hao Li, 2023. "Cash holding dynamics and competition intensity: Evidence from UK firms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 641-662, January.
    6. Ahrends, Meike & Drobetz, Wolfgang & Puhan, Tatjana Xenia, 2018. "Cyclicality of growth opportunities and the value of cash holdings," Journal of Financial Stability, Elsevier, vol. 37(C), pages 74-96.
    7. Rapp, Marc Steffen & Schmid, Thomas & Urban, Daniel, 2014. "The value of financial flexibility and corporate financial policy," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 288-302.
    8. Larkin, Yelena, 2013. "Brand perception, cash flow stability, and financial policy," Journal of Financial Economics, Elsevier, vol. 110(1), pages 232-253.
    9. Xin‐tu Lei & Qing‐yuan Xu & Cheng‐ze Jin, 2022. "Nature of property right and the motives for holding cash: Empirical evidence from Chinese listed companies," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(5), pages 1482-1500, July.
    10. Amess, Kevin & Banerji, Sanjay & Lampousis, Athanasios, 2015. "Corporate cash holdings: Causes and consequences," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 421-433.
    11. Jianqiao Huang & Yunsen Chen & Xin Dai & Xiaoran Ni, 2022. "Stock market liberalisation and corporate cash holdings: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1925-1955, April.
    12. Winston Wei Dou & Yan Ji, 2021. "External Financing and Customer Capital: A Financial Theory of Markups," Management Science, INFORMS, vol. 67(9), pages 5569-5585, September.
    13. Agarwal, Manoj K. & Ma, Zecong & Park, Chang Hee & Zheng, Yilong, 2022. "The impact of a manufacturer’s financial liquidity on its market strategies and pricing and promotion decisions in retail grocery markets," Journal of Business Research, Elsevier, vol. 142(C), pages 844-857.
    14. Zhang, Jinjin & Chen, Huili & Zhang, Pengdong & Jiang, Min, 2022. "Product market competition and the value of corporate cash: An agency theory explanation," International Review of Financial Analysis, Elsevier, vol. 84(C).
    15. Joseph, Andreas & Kneer, Christiane & van Horen, Neeltje & Saleheen, Jumana, 2019. "All you need is cash: corporate cash holdings and investment after the financial crisis," Bank of England working papers 843, Bank of England.
    16. Li, Jay Y. & Tang, Dragon Yongjun, 2022. "Product market competition with CDS," Journal of Corporate Finance, Elsevier, vol. 73(C).
    17. Klasa, Sandy & Ortiz-Molina, Hernán & Serfling, Matthew & Srinivasan, Shweta, 2018. "Protection of trade secrets and capital structure decisions," Journal of Financial Economics, Elsevier, vol. 128(2), pages 266-286.
    18. Kuti, Mónika, 2011. "Cash Flow at Risk, Financial Flexibility and Financing Constraint," Public Finance Quarterly, Corvinus University of Budapest, vol. 56(4), pages 505-517.
    19. Li, Xiaodan & Pan, Zikui & Ho, Kung-Cheng & Bo, Yu, 2024. "Epidemics, local institutional quality, and corporate cash holdings," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 193-210.
    20. Grennan, Jillian, 2019. "Dividend payments as a response to peer influence," Journal of Financial Economics, Elsevier, vol. 131(3), pages 549-570.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:finmgt:v:51:y:2022:i:2:p:539-571. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/fmaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.