Dividends and Taxes: The Moderating Role of Agency Conflicts

Dividends and Taxes: The Moderating Role of Agency Conflicts

Janis Berzins, Bogdan Stacescu, Øyvind Bøhren

Series number :

Serial Number: 
540/2017

Date posted :

December 07 2017

Last revised :

July 30 2019
SSRN Share

Keywords

  • dividends • 
  • taxes • 
  • agency costs • 
  • shareholder conflicts • 
  • indirect ownership

We find that potential conflicts between majority and minority shareholders strongly influence how dividends respond to taxes.

When the controlling shareholder has a smaller stake, the incentives to extract private benefits are stronger – a shareholder conflict that can be mitigated by dividend payout.We study a large and clean regulatory shock in Norway that increases the dividend tax rate for all individuals from 0% to 28%. We find that dividends drop less the higher the potential shareholder conflict, suggesting that dividend policy trades off tax and agency considerations. The average payout ratio falls by 30 percentage points when the conflict potential is low, but by only 18 points when it is high. These lower dividends cannot be explained by higher salaries to shareholders or diverse liquidity needs. We also observe a strong increase in indirect ownership of high-conflict firms through tax-exempt holding companies and suggest policy implications for intercorporate dividend taxation.

Published in

Published in: 
Publication Title: 
Journal of Corporate Finance 58, 2019, pp. 583-604

Authors