Payout taxes and the allocation of investment | Zendy

Bo Becker | Zendy; Marcus Jacob | Zendy; Martin Jacob | Zendy

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Payout taxes and the allocation of investment

Author(s) -

Bo Becker,

Marcus Jacob,

Martin Jacob

Publication year - 2012

Publication title -

journal of financial economics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 11.673

H-Index - 256

eISSN - 1879-2774

pISSN - 0304-405X

DOI - 10.1016/j.jfineco.2012.08.003

Subject(s) - retained earnings , earnings , equity (law) , economics , monetary economics , investment (military) , tax deferral , dividend payout ratio , finance , dividend , tax reform , public economics , gross income , state income tax , dividend policy , politics , political science , law

When corporate payout is taxed, internal equity (retained earnings) is cheaper than external equity (share issues). If there are no perfect substitutes for equity finance, payout taxes may therefore have an effect on the investment of firms. High taxes will favor investment by firms who can finance internally. Using an international panel with many changes in payout taxes, we show that this prediction holds well. Payout taxes have a large impact on the dynamics of corporate investment and growth. Investment is “locked in” in profitable firms when payout is heavily taxed. Thus, apart from any level effects, payout taxes change the allocation of capital.

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