Did Firms Substitute Dividends for Share Repurchases after the 2003 Reductions in Shareholder Tax Rates?

Working Paper No. 13601 This paper tests whether firms altered their dividend and share repurchase policies in response to the 2003 reductions in shareholder tax rates. We predict that firms substituted dividends for repurchases, because the reduction in dividend tax rates exceeded the reduction in...

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Bibliographic Details
Published in:NBER Working Paper Series 2007-11, p.13601
Main Authors: Blouin, Jennifer L, Jana Smith Raedy, Shackelford, Douglas A
Format: Article
Language:English
Subjects:
Capital gains
Dividends
Economic theory
Executive compensation
Investments
Restricted stock
Stockholders
Tax cuts
Tax rates
Taxes
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Summary:Working Paper No. 13601 This paper tests whether firms altered their dividend and share repurchase policies in response to the 2003 reductions in shareholder tax rates. We predict that firms substituted dividends for repurchases, because the reduction in dividend tax rates exceeded the reduction in the capital gains tax rates. As expected, we find substitution and find that it is increasing in the percentage of the company owned by individual investors, the only shareholders affected by the legislation. These findings are consistent with boards of directors considering the tax preferences of individual stockholders (particularly officers and managers) when setting dividend and share repurchase policies.
ISSN:0898-2937
DOI:10.3386/w13601