What Do Firms Do When Dividend Tax Rates Change

Question 1

Libby box

Answer 1

Cause - change in investor level taxes
Effects - firm effort to allow investor to optimise taxation of income derived from firm

Cause - change in investor level dividend taxation rate
Effect - changes in timing of dividend payments (special dividend & shifting of regular dividends)

Controls - month fixed effects , year fixed effects, REITs, insider ownership, agency effects , purchase activity & historical tax rate changes

Question 2

Explain special dividend and dividend shifting

Answer 2

Special dividend - makes additional dividend payment that does not commit to the firm to a certain dividend payout level in the long term

Dividend shifting - shift regular dividend payments in time so that they occur in a low tax period

Question 3

Hypothesis

Answer 3

H1 : investor level taxes affect firm payout policy decisions

Question 4

Table 3 - interpret the coefficients of the independent variable NOVDEC2010 for both panels

Answer 4

• the coefficients ß1 (ß2) 0.0401 (0.0849) in column 1 are positive and highly significant
• incase in the frequency of special dividend payments in NOVDEC2010
• NOVDEC2012 = firms anticipate dividend tax increase
• the coefficients ß1 (ß2) 0.0431 (0.0878) in column 2 are also positive and significant
• dollar value per special dividend was also increased in NOVDEC2010 and NOVDEC2012

-Coefficients for NOVDEC2012 are much larger to 2010
- a tax increase was expected in 2013

Question 5

Figure 1 panel A - what impact does the expected increase in dividend tax rates have on firms & on shareholders ?
And how can this effect be identified in fig 1

Answer 5

• Firms with a high insider ownership show a greater response to the expected tax rate increases at the end of 2010 & 2012
• The graph shows the frequency of special dividends paid in each month - portioned by high and low insider ownership

Question 6

Given fig 5 does the fig support the author’s expectation?

Answer 6

Yes
- the study finds a spike of special dividends in the final months of 2010 & 2012 like in the graph as well as shifting of regular dividends into the last months of the low tax years
- Firms in fact change behaviour to maximise shareholders wealth (i.e respond to shareholders level taxes)