Investor Protection, Taxation, and Dividends
51 Pages Posted: 12 Jun 2012 Last revised: 24 Jun 2012
Date Written: May 29, 2012
Abstract
We test the impact of taxes and governance systems on dividend payouts across countries. We show that, unlike previous studies, firms in strong investor protection countries pay lower cash dividends than in weak protection countries when the classical tax system is implemented, but they repurchase more shares to maximise their shareholders’ after-tax returns. In weak protection countries, cash dividends and repurchases are low and less responsive to taxes. Our results suggest that when investors are protected, they weigh the tax cost of dividends against the benefit of mitigating the agency cost, but, when they are not, they accept whatever dividends they can extract, even when this entails high tax costs.
Keywords: Shareholder rights, Dividend policy, Dividend taxation, Agency costs
JEL Classification: G18, G35, H24
Suggested Citation: Suggested Citation
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