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Dividend Taxes and Investment Efficiency: Evidence from the 2003 U.S. Personal Taxation Reform

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897
Author
J.B. (Jong-Bom) Chay Byung-Uk Chong Hyun Joong Im
Category
Financial
Date Posted
2020/06/04
Date Retrieved
2022/09/25
Date Revised
2022/09/25
Date Written
2022/05/05
Description
We examine the effect of a large dividend tax cut on corporate investment efficiency by exploiting the 2003 personal taxation reform in the U.S. as a quasi-natural experiment. Using a difference-in-differences approach based on the probability that a firms marginal investor was an individual investor we show that the 2003 dividend tax cut significantly improved the investment efficiency of U.S. listed firms. However we find no evidence that the dividend tax cut increased the level of investment of U.S. listed firms. Further we show that the tax cut increased investment efficiency by mitigating agency problems associated with the excessive free cash flows of overinvesting firms and by relaxing the financial constraints of underinvesting firms.
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JEL Classifications
G12 G14 G15 G31
Keywords
Dividend Taxation Investment Efficiency Financial Constraints Free Cash Flows
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Pages
53
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URL
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4228399
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