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Tax Costs and Signalling Benefits: The Impact of Surplus ACT
Author(s) -
Hodgkinson Lynn
Publication year - 2002
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00436
Subject(s) - dividend , earnings , signalling , monetary economics , economics , constraint (computer aided design) , business , microeconomics , finance , mechanical engineering , engineering
Companies with surplus ACT are faced with additional tax costs if they use dividends to signal information to investors, hence there is a trade‐off between tax costs and signalling benefits. This paper provides evidence that investors' reactions to dividend surprises are influenced by the signal generated by earnings and tax planning considerations. The results indicate that in the presence of a positive earnings signal and a binding tax constraint, decreases in dividends are value enhancing.