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Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut
Author(s) -
BROWN JEFFREY R.,
LIANG NELLIE,
WEISBENNER SCOTT
Publication year - 2007
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.1540-6261.2007.01261.x
Subject(s) - dividend , dividend policy , agency cost , monetary economics , incentive , dividend payout ratio , business , dividend tax , stock (firearms) , economics , finance , tax reform , state income tax , corporate governance , microeconomics , gross income , public economics , mechanical engineering , engineering , shareholder
We test whether executive stock ownership affects firm payouts using the 2003 dividend tax cut to identify an exogenous change in the after‐tax value of dividends. We find that executives with higher ownership were more likely to increase dividends after the tax cut in 2003, whereas no relation is found in periods when the dividend tax rate was higher. Relative to previous years, firms that initiated dividends in 2003 were more likely to reduce repurchases. The stock price reaction to the tax cut suggests that the substitution of dividends for repurchases may have been anticipated, consistent with agency conflicts.