Working Paper: NBER ID: w30808
Authors: Katarzyna A. Bilicka; Irem Guceri; 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: dividend taxation; firm performance; payout responses; liquidity shock
JEL Codes: G11; G32; H25; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dividend Tax (H25) | Dividend Payouts (G35) |
| Dividend Tax (H25) | Investment Behavior (G11) |
| Dividend Tax (H25) | Retained Earnings (G35) |
| Reduction in Dividend Payouts (G35) | Lower Probability of Bankruptcy (G33) |
| December Year-End Firms (G24) | Dividend Payouts (G35) |
| June Year-End Firms (G24) | Dividend Payouts (G35) |