Investor Protection, Taxation, and Dividends

51 Pages Posted: 12 Jun 2012 Last revised: 24 Jun 2012

See all articles by Mohammed Alzahrani

Mohammed Alzahrani

King Fahd University of Petroleum & Minerals

Meziane Lasfer

Bayes Business School, City, University of London

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

Alzahrani, Mohammed and Lasfer, Meziane, Investor Protection, Taxation, and Dividends (May 29, 2012). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2083331

Mohammed Alzahrani (Contact Author)

King Fahd University of Petroleum & Minerals ( email )

Saudi Arabia
96638601626 (Phone)
96638602585 (Fax)

HOME PAGE: http://faculty.kfupm.edu.sa/FINEC/mfaraj/

Meziane Lasfer

Bayes Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
Great Britain
+44 20 7040 8634 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://https://www.bayes.city.ac.uk/faculties-and-research/experts/meziane-lasfer

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