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The Lock-In Effect and the Corporate Payout Puzzle

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  • Chris Mitchell

Abstract

Taxes on capital gains are deferred until realization, whereas dividend taxes are levied 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 develops a model of corporate payout policy to demonstrate that tax deferment can also provide a partial solution to the payout puzzle: if shareholders demand repurchase premiums when selling equity back to a firm - as compensation for accelerated realizations - then dividend payments can become tax-efficient. This mechanism is appealing because it jointly explains a number of payout regularities without appealing to asymmetric information, incomplete contracting, repurchase constraints, and/or shareholder irrationality.

Suggested Citation

  • Chris Mitchell, 2019. "The Lock-In Effect and the Corporate Payout Puzzle," ISER Discussion Paper 1070, Institute of Social and Economic Research, The University of Osaka.
    • Handle: RePEc:dpr:wpaper:1070
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    File URL: https://www.iser.osaka-u.ac.jp/static/resources/docs/dp/2019/DP1070.pdf
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