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Individual Investors’ Dividend Taxes and Corporate Payout Policies

Published online by Cambridge University Press:  24 April 2017

Oliver Zhen Li ,
Hang Liu ,
Chenkai Ni  and
Kangtao Ye
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Abstract

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The 2012 Dividend Tax Reform in China ties individual investors’ dividend tax rates to the length of their shareholding period. We find that firms facing a reduction (increase) in their individual investors’ dividend tax rates are more (less) likely to increase dividend payout. Such an effect is concentrated in firms where incentives of controlling shareholders and minority shareholders are aligned. Furthermore, investors respond to this tax law change by reducing trading activities before the cum-dividend day and successfully lower their dividend tax penalty. Overall, our evidence enhances the notion that individual investors’ tax profiles shape firms’ payout policies.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 3 , June 2017 , pp. 963 - 990
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1

We thank Paul Malatesta (the editor), an anonymous referee, and seminar participants at Peking University, Renmin University of China, the 2014 China Finance and Accounting Conference at Xiamen, and the 2014 World Finance & Banking Symposium at Singapore for helpful comments. Li acknowledges a Tier 2 grant (MOE2012-T2-1-035) from the Ministry of Education of Singapore. Liu acknowledges financial support from the National Nature Science Foundation of China (Grant Number 71402017) and China Internal Control Research Center. Ni acknowledges financial support from the National Nature Science Foundation of China (Grant Number 71502171). Ye acknowledges financial support from the National Nature Science Foundation of China (Grant Nos. 71072145 and 71432008).

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