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Dissecting dividend decisions: some clues about the effects of dividend taxation from recent UK reforms

Author

Listed:
  • Stephen Bond

    (Institute for Fiscal Studies and Nuffield College, Oxford)

  • Michael Devereux

    (Institute for Fiscal Studies and University of Oxford)

  • Alexander Klemm

    (Institute for Fiscal Studies)

Abstract

We present empirical evidence which suggests that a big increase in dividend taxation for UK pension funds in July 1997 affected the form in which some UK companies chose to make dividend payments, but otherwise had limited effects on both the level of dividend payments and the level of investment. These findings are consistent with a version of the 'new view' of dividend taxation. We also identify a group of firms whose dividend choices are difficult to reconcile with (stock market) value maximisation.

Suggested Citation

  • Stephen Bond & Michael Devereux & Alexander Klemm, 2005. "Dissecting dividend decisions: some clues about the effects of dividend taxation from recent UK reforms," IFS Working Papers W05/17, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:05/17
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    References listed on IDEAS

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    1. Vlieghe, Gertjan & Stephen Bond & Alexander Klemm & Rain Newton-Smith & Murtaza Syed, 2003. "The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment," Royal Economic Society Annual Conference 2003 212, Royal Economic Society.
    2. Stephen Bond, 2000. "Noisy Share Prices and the Q Model of Investment," Econometric Society World Congress 2000 Contributed Papers 1320, Econometric Society.
    3. Hayashi, Fumio, 1985. "Corporate finance side of the Q theory of investment," Journal of Public Economics, Elsevier, vol. 27(3), pages 261-280, August.
    4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    5. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    6. Auerbach, Alan J. & Hassett, Kevin A., 2003. "On the marginal source of investment funds," Journal of Public Economics, Elsevier, vol. 87(1), pages 205-232, January.
    7. Alan J. Auerbach, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(3), pages 433-446.
    8. Devereux, Michael P. & Keen, Michael & Schiantarelli, Fabio, 1994. "Corporation tax asymmetries and investment : Evidence from U.K. panel data," Journal of Public Economics, Elsevier, vol. 53(3), pages 395-418, March.
    9. Mervyn A. King, 1974. "Taxation and the Cost of Capital," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(1), pages 21-35.
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    Cited by:

    1. Seppo Kari & Hanna Karikallio & Jukka Pirttilä, 2008. "Anticipating Tax Changes: Evidence from the Finnish Corporate Income Tax Reform of 2005," Fiscal Studies, Institute for Fiscal Studies, vol. 29(2), pages 167-196, June.
    2. Annette Alstadsæter & Erik Fjærli, 2009. "Neutral taxation of shareholder income? Corporate responses to an announced dividend tax," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(4), pages 571-604, August.
    3. Driver, Ciaran & Grosman, Anna & Scaramozzino, Pasquale, 2020. "Dividend policy and investor pressure," Economic Modelling, Elsevier, vol. 89(C), pages 559-576.
    4. Seppo Kari & Hanna Karikallio & Jukka Pirttilä, 2009. "The Impact of Dividend Taxation on Dividends and Investment: New Evidence Based on a Natural Experiment," CESifo Working Paper Series 2756, CESifo.
    5. Jarkko Harju & Seppo Kari, 2017. "Dividend Taxes and Decisions of MNEs: Evidence from a Finnish Tax Reform," CESifo Economic Studies, CESifo Group, vol. 63(1), pages 45-77.
    6. Giancarlo Corsetti & Michael P. Devereux & John Hassler & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2011. "Chapter 5: Taxation and Regulation of the Financial Sector," EEAG Report on the European Economy, CESifo, vol. 0, pages 147-169, February.
    7. Alexander Klemm, 2007. "Allowances for Corporate Equity in Practice," CESifo Economic Studies, CESifo Group, vol. 53(2), pages 229-262, June.
    8. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    9. Christian Bellak & Markus Leibrecht, 2010. "Does Lowering Dividend Tax Rates IncreaseDividends Repatriated? Evidence of Intrafirm Cross-Border Dividend Repatriation Policiesby German Multinational Enterprises," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 66(4), pages 350-383, December.

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