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Free Cash Flow, Shareholder Value, and the Undistributed Profits Tax of 1936 and 1937
Author(s) -
CHRISTIE WILLIAM G.,
NANDA VIKRAM
Publication year - 1994
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1994.tb04779.x
Subject(s) - monetary economics , dividend , agency cost , free cash flow , business , dividend payout ratio , economics , incentive , earnings , retained earnings , cash flow , shareholder , dividend policy , accounting , finance , corporate governance , market economy
In 1936, the Federal Government unexpectedly imposed a tax on undistributed corporate profits. Despite the direct costs of the tax, its announcement produced a positive revaluation of corporate equity, particularly among lower‐payout firms. We interpret this as evidence of a divergence between managerial and shareholder preferences regarding dividend payout policies, consistent with the presence of agency costs. We also find that despite the incentives created by the tax, the actual growth in dividends during 1936 was lower among firms judged more likely to be subject to higher agency costs after controlling for liquidity, debt, and the growth in earnings.