Working Paper: CEPR ID: DP17871
Authors: Katarzyna Bilicka; Irem Geri; Evangelos Koumanakos
Abstract: We analyze the short and long-run performance of firms that were differentially affected by a new tax on dividends in the lead-up to the Global Financial Crisis. We use exogenous policy variation for firms with different legal statuses and financial year-end dates to causally identify the policy impact. Consistent with intertemporal tax arbitrage, immediately-affected firms significantly reduce payouts. At a time of severe liquidity shortage, the average firm uses the undistributed cash to pay back debt. In the long run, the allocation of undistributed cash to investment, retained earnings, and debt repayment predicts growth and the likelihood of bankruptcy.
Keywords: investment; dividend tax; firm survival; intertemporal tax arbitrage
JEL Codes: H32; H25; G32; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of new dividend tax (H26) | reduction in dividend distributions (G35) |
| introduction of new dividend tax (H26) | significant decrease in dividend payouts for December year-end firms (G35) |
| introduction of new dividend tax (H26) | increase in distributions for June year-end firms (G35) |
| reduced dividend payouts (G35) | increased investment and retained earnings (G31) |
| increased investment and retained earnings (G31) | enhanced long-term resilience against financial crises (F65) |
| reduced dividend payouts (G35) | lower probability of bankruptcy during financial crisis (G33) |
| utilization of retained earnings for productive investment (G31) | stronger growth and survival rates (O44) |
| introduction of new dividend tax (H26) | changes in dividend distributions (G35) |