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Does dividend tax impede competition for corporate charters?

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  • Lai, Tat-kei
  • Ng, Travis

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.

Suggested Citation

  • Lai, Tat-kei & Ng, Travis, 2017. "Does dividend tax impede competition for corporate charters?," Journal of Comparative Economics, Elsevier, vol. 45(4), pages 751-772.
    • Handle: RePEc:eee:jcecon:v:45:y:2017:i:4:p:751-772
    DOI: 10.1016/j.jce.2017.08.001
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    More about this item

    Keywords

    Jurisdictional competition; Corporate charters; Takeover regulations; Corporate law; Corporate federalism; Tax law; Corporate governance; Agency costs; Dividend taxation; Dividend payment; Investment;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law

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