Dividend Taxes and Investment Efficiency: Evidence from the 2003 U.S. Personal Taxation Reform

Journal of Accounting and Economics, Volume 75, No. 1, 101514, 2023

53 Pages Posted: 4 Jun 2020 Last revised: 6 Sep 2023

See all articles by J.B. (Jong-Bom) Chay

J.B. (Jong-Bom) Chay

Sungkyunkwan University (SKKU)

Byung-Uk Chong

College of Business Administration, Univ of Seoul

Hyun Joong Im

The University of Seoul

Date Written: May 5, 2022

Abstract

We examine the effect of a large dividend tax cut on corporate investment efficiency by exploiting the 2003 personal taxation reform in the U.S. as a quasi-natural experiment. Using a difference-in-differences approach based on the probability that a firm's marginal investor was an individual investor, we show that the 2003 dividend tax cut significantly improved the investment efficiency of U.S. listed firms. However, we find no evidence that the dividend tax cut increased the level of investment of U.S. listed firms. Further, we show that the tax cut increased investment efficiency by mitigating agency problems associated with the excessive free cash flows of overinvesting firms and by relaxing the financial constraints of underinvesting firms.

Keywords: Dividend Taxation, Investment Efficiency, Financial Constraints, Free Cash Flows

JEL Classification: G12, G14, G15, G31

Suggested Citation

Chay, J.B. (Jong-Bom) and Chong, Byung-Uk and Im, Hyun Joong, Dividend Taxes and Investment Efficiency: Evidence from the 2003 U.S. Personal Taxation Reform (May 5, 2022). Journal of Accounting and Economics, Volume 75, No. 1, 101514, 2023, Available at SSRN: https://ssrn.com/abstract=3579858 or http://dx.doi.org/10.2139/ssrn.3579858

J.B. (Jong-Bom) Chay

Sungkyunkwan University (SKKU) ( email )

SKK Business School
25-2 Sungkyunkwan-ro, Jongno-gu
Seoul, 03063
Korea, Republic of (South Korea)
+82-2-760-0439 (Phone)

Byung-Uk Chong

College of Business Administration, Univ of Seoul ( email )

Seoulsiripdae-ro 163
Dongdaemun-gu
Seoul
Korea, Republic of (South Korea)
+82-2-6490-2250 (Phone)
+82-2-6490-2219 (Fax)

HOME PAGE: http://www.uos.ac.kr

Hyun Joong Im (Contact Author)

The University of Seoul ( email )

163 Seoulsiripdae-ro
Dongdaemun-gu
Seoul, 02504
Korea, Republic of (South Korea)
+82-2-6490-2268 (Phone)
+82-2-6490-2219 (Fax)

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