The Effect of Shareholder Taxes on Corporate Payout Choice

• Published in: Journal of financial and quantitative analysis Vol. 42; no. 4; pp. 991 - 1019
• Main Author: Moser, William J.
• Format: Journal Article
• Language: English
• Published: New York, USA Cambridge University Press 01-12-2007; University of Washington School of Business Administration, University of Utah David Eccles School of Business, and New York University Leonard N. Stern School of Business
• Subjects: Bank stocks; Business structures; Capital gains; Capital returns; Companies; Corporate finance; Dividend policy; Dividends; Financial management; Income taxes; Ownership; Pay-off; Political finance; Property taxes; Repurchasing; Shareholders; Stock buyback; Stock prices; Stock returns; Stock shares; Stockholders; Tax rates; Taxation; U.S.A
• ISSN: 0022-1090; 1756-6916
• DOI: 10.1017/S0022109000003471

This study investigates whether the difference in individual shareholder tax rates between dividend income and capital gain (the dividend tax penalty) affects a firm's choice between distributing funds to shareholders through dividends or share repurchases. The results of this study suggest that, in periods in which the dividend tax penalty increases, firms are more likely to distribute funds to shareholders through share repurchases as opposed to dividends. The results also indicate that the relation between the dividend tax penalty and corporate payout choice is affected by the types of shareholders who own stock in the firm. As tax-disfavored institutional ownership increases and the dividend tax penalty increases, firms are more likely to repurchase shares as opposed to distributing dividends. In contrast, as tax-favored institutional ownership increases and the dividend tax penalty increases, firms are less likely to repurchase shares as opposed to distributing dividends. As senior managerial share ownership increases and the dividend tax penalty increases, firms are more likely to make distributions to shareholders in the form of share repurchases.