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What If Dividends Were Tax‐Exempt? Evidence from a Natural Experiment

Author

Listed:
  • Dušan Isakov
  • Christophe Perignon

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Jean-Philippe Weisskopf

Abstract

We study the effect of dividend taxes on the payout and investment policies of publicly listed firms. To do so, we exploit a unique setting in Switzerland where, following the corporate tax reform of 2011, some but not all firms were suddenly able to pay tax-exempt dividends to their shareholders. Using a difference-in-differences specification, we show that treated firms swiftly and permanently increase their dividend payout by around 30% compared to control firms after the tax cut. When studying the effect of agency conflicts, we show that the impact on the payout is less pronounced for firms in which the controlling shareholders have more voting rights than cash-flow rights. We find a significant positive abnormal stock return after the announcement of the payment of a tax-exempt dividend. However, reducing dividend taxes does not boost investment. This is due to a significant drop in retained earnings and to the fact that equity issuances do not surge after the tax cut. Our evidence is consistent with models where the marginal source of finance is retained earnings, and inconsistent with the neoclassical theory of dividend taxation.

Suggested Citation

  • Dušan Isakov & Christophe Perignon & Jean-Philippe Weisskopf, 2020. "What If Dividends Were Tax‐Exempt? Evidence from a Natural Experiment," Working Papers hal-02953033, HAL.
    • Handle: RePEc:hal:wpaper:hal-02953033
    DOI: 10.2139/ssrn.3190485
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    Citations

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    Cited by:

    1. Dautović, Ernest & Gambacorta, Leonardo & Reghezza, Alessio, 2023. "Supervisory policy stimulus: evidence from the euro area dividend recommendation," Working Paper Series 2796, European Central Bank.
    2. Martin Huber, 2019. "An introduction to flexible methods for policy evaluation," Papers 1910.00641, arXiv.org.
    3. Xiaoqiao Wang & Jing Xie & Bohui Zhang & Xiaofeng Zhao, 2024. "Unraveling the Dividend Puzzle: A Field Experiment," Working Papers 202406, University of Macau, Faculty of Business Administration.
    4. Matteo F. Ghilardi & Roy Zilberman, 2024. "Macroeconomic Effects of Dividend Taxation with Investment Credit Limits," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 2(3), pages 409-448.
    5. Lee, Seung Chul & Park, S. Saeyeul, 2023. "Dividend taxes and corporate choice: Evidence from 2015 tax cut in South Korea," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    6. Abdullah AlGhazali & Khamis Hamed Al-Yahyaee & Richard Fairchild & Yilmaz Guney, 2024. "What do dividend changes reveal? Theory and evidence from a unique environment," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 499-552, February.

    More about this item

    Keywords

    corporate taxes; dividends; pay-outs; investment; real effects;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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