Misaligned Tax Incentives: The Effects of Tax Motivated Dividend Payout Decisions

• In Event: Doctoral Student-Faculty Interchange: Audit, Tax, and Diversity

Abstract

I examine whether firms incur costs in order to pay special dividends in the tax-favored period immediately before an increase to dividend tax rates associated with the expiration of JGTRRA (Hanlon and Hoopes, 2014). I find that, on average, firms fund these distributions with a reduction in capital expenditures and R&D, and an increase in debt financing, in the period following the tax motivated special divided. However, these effects are concentrated among firms that face high agency costs, where I measure agency costs as either low insider ownership or misaligned tax incentives between inside owners and tax-insensitive shareholders. I find evidence that the reduction in investments is associated with a significant decrease to shareholders’ wealth over the following two years. These findings add to the accounting and finance literature’s understanding of the potential for tax-based agency issues in influencing real corporate decisions.

Author

• Trent Krupa, University of Connecticut