Working Paper: NBER ID: w16129
Authors: jennifer blouin; jana raedy; douglas shackelford
Abstract: This paper jointly evaluates firm-level changes in investor composition and shareholder distributions following a 2003 reduction in the dividend and capital gains tax rates for individuals. We find that directors and officers, but not other individual investors, rebalanced their portfolios to maximize after-tax returns in light of the new tax rules. We also find that firms adjusted their distribution policy (specifically, dividends versus share repurchases) in a manner consistent with the altered tax incentives for individual investors. To our knowledge, this is the first paper to employ simultaneous equations to estimate both investor and managerial responses to the 2003 rate reductions. We find that estimating a system of equations leads to different inferences.
Keywords: No keywords provided
JEL Codes: g34; g35; h24; k34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 2003 reduction in shareholder taxes (H23) | individual investors rebalancing their portfolios (G11) |
| individual investors rebalancing their portfolios (G11) | firms altering their distributions (D39) |
| 2003 reduction in shareholder taxes (H23) | firms adjusting their distribution policies to favor dividends (G35) |
| insider ownership (G34) | proportion of profits distributed as dividends (G35) |
| large individual ownership (G32) | firms modifying their payout policies (G35) |
| ownership structure (G32) | changes in distribution policy (D39) |
| 2003 reduction in shareholder taxes (H23) | managerial decisions (M51) |
| insiders adjusting their holdings (G34) | changes in distribution policy (D39) |
| tax policy changes (H29) | differential response of non-executive individual investors and mutual funds (G41) |