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Investor protection, taxation, and dividends

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  • Alzahrani, Mohammed
  • Lasfer, Meziane

Abstract

We test the impact of taxes and governance systems on dividend payouts across countries. We show that, unlike previous studies, firms in strong investor protection countries pay lower cash dividends than in weak protection countries when the classical tax system is implemented, but they repurchase more shares to maximise their shareholders' after-tax returns. In weak protection countries, cash dividends and repurchases are low and less responsive to taxes. Our results suggest that when investors are protected, they weigh the tax cost of dividends against the benefit of mitigating the agency cost, but, when they are not, they accept whatever dividends they can extract, even when this entails high tax costs.

Suggested Citation

  • Alzahrani, Mohammed & Lasfer, Meziane, 2012. "Investor protection, taxation, and dividends," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 745-762.
    • Handle: RePEc:eee:corfin:v:18:y:2012:i:4:p:745-762
    DOI: 10.1016/j.jcorpfin.2012.06.003
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    More about this item

    Keywords

    Shareholder rights; Dividend policy; Dividend taxation; Agency costs;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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