Did Firms Substitute Dividends for Share Repurchases After the 2003 Reductions in Shareholder Tax Rates?
National Bureau of Economic Research, 2007 - Business enterprises - 40 pages
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.
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13-F filings balanced panel binomial test capital gains tax categorical variable collected by Thomson Column Compustat consistent repurchasers control variables dividend and capital dividend initiators dividend or repurchase dividend payers dividend tax rate dividends and repurchases dividends and share dividends before enactment eight quarters preceding filings and collected Financial's Insider Filing Financial's Institutional Holdings firms substituted dividends free cash flow gains tax rates individual investors individual ownership inferences INSIDER coefficient Insider Filing data Institutional Holdings database Kenan-Flagler Business School lagged assets data44 least once mutual funds non-individual investors NONEXEC coefficients NONEXEC*POST coefficient p-value paid dividends percent percentage of shares PERM POST coefficient pre-enactment regression model reported in 13-F reported in Thomson repurchase before enactment repurchased shares repurchases to dividends restricted stock retained earnings scaled by lagged share repurchases shift from repurchases Table tax rate reductions Thomson Financial's Insider Thomson Financial's Institutional Total Dividends Total Repurchases