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.
| Original language | English |
|---|---|
| Pages (from-to) | 745-762 |
| Number of pages | 18 |
| Journal | Journal of Corporate Finance |
| Volume | 18 |
| Issue number | 4 |
| DOIs | |
| State | Published - Sep 2012 |
Bibliographical note
Funding Information:We would like to thank Mara Faccio, Ashraf Eid, Lubomir Litov, Laura Moreau, and Jungwon Suh, Huai Zhang for the useful suggestions. We also benefited from comments offered by seminar participants at Western Finance Association meetings, European Financial Management Association meetings, Asian Finance Association meetings, Financial Management Association meetings, Cass Business School, King Fahd University, Eastern Mediterranean University, Roma Tre University, and Universite Paris Dauphine. This work started when Alzahrani visited Cass Business School. He thanks Cass for the hospitality and support and acknowledges the summer research grant from the British Council and the support from King Fahd University of Petroleum & Minerals .
Keywords
- Agency costs
- Dividend policy
- Dividend taxation
- Shareholder rights
ASJC Scopus subject areas
- Business and International Management
- Finance
- Economics and Econometrics
- Strategy and Management
