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Dividends and Profits: Some Unsubtle Foreign Influences

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  • James R. Hines Jr.

Abstract

American corporations earn a large and growing share of their profits from their foreign operations. This paper evaluates the effect of foreign earnings on dividend payments by American corporations. The results suggest that the effect may be rather dramatic: that, all other things equal, U.S. corporations pay dividends out of foreign earnings at rates that are three times higher than their payout rates from domestic earnings. Why firms do so is unclear, though this behavior may be consistent with a signaling view of dividends. There is a curious tax consequence of this high payout rate on foreign earnings: the tax system, which grants foreign tax credits to U.S. corporations for the foreign taxes they pay, may receive more revenue from taxing the dividends of U.S. shareholders than from the corporate tax on foreign earnings.

Suggested Citation

  • James R. Hines Jr., 1991. "Dividends and Profits: Some Unsubtle Foreign Influences," NBER Working Papers 3730, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3730
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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