Tax preferences, dividends and lobbying for maximum value

Abstract

Background: The value of equity investments depends to some extent on the tax consequences for investors. When groups of investors have different tax preferences, this can lead to conflicting pressures on firms to either retain earnings or pay dividends. The findings of this study will be of interest to researchers of taxation and corporate governance alike, as they highlight the role that corporate shareholders play in the decisions of the firm. Investors and regulators will also be interested in the findings as they reveal more about the interaction between shareholders with conflicting interests. Lastly, changes in behaviour as a result of changes in tax legislation are of interest to those with fiscal responsibility.Setting: A 2012 dividend tax change in South Africa, which simultaneously altered the tax preferences of individual and corporate investors, provides a unique opportunity to investigate firms’ reaction to their investors’ tax preferences.Aim: This article seeks to determine whether firms respond to changes in their investors’ tax preferences in their decisions to either retain earnings or pay dividends.Method: The article investigates the responses of firms to the 2012 dividend tax change using multivariate regressions.Results: Findings show that firms consider changes in the tax preferences of their investors in setting dividend policies. In addition, it appears that corporates have greater success in lobbying for beneficial dividend changes than individuals.Conclusion: Changes in investors’ tax preferences impact on firms’ dividend policy decisions. These decisions ultimately affect the value of the firm to its investors

The relationship between investor tax preferences and the payout methods of JSE listed companies

“…Only past profitability (ln ROA it-1 ) was found to have a statistically significant positive relationship with changes in other payout methods, which suggests the retention of past profits (ln ROA it-1 ) as a more important determinant than changes in current profits (Δ ln ROA it ). Previous payout methods (ln Payout methods it-1 ) were found to have a statistically significant negative relationship with changes in dividends and other payout methods, in line with expectation and previous literature (Badenhorst 2017;Geiler & Renneboog 2015;Poterba 2004). These findings confirm the importance of profitability as well as past payout methods in explaining changes in payout methods.…”

“…The first explanatory variable was the change in the natural logarithm of profit (∆ ln ROA it ). More profitable companies, based on ROA, were found to consistently pay higher dividends (Badenhorst 2017;Nyere & Wesson 2019) and high accounting profit was also submitted as a prerequisite for payout earnings by different payout channels (Geiler & Renneboog 2015).…”

“…Descriptive evidence suggests that, since the introduction of dividends tax in South Africa, corporate investors would prefer dividends and individual investors would prefer capital gains when tax is the only consideration . Explanatory evidence based on the dividend growth during 2012 and 2013 has also been submitted that JSE-listed companies with higher corporate shareholding grew dividends significantly faster than other companies (Badenhorst 2017). Subsequent to these South African studies, further increases in the applicable tax rates occurred, which further pronounce the differential of taxation on dividends and capital gains, and afford an opportunity to incorporate investor tax preference parameters in South African literature.…”

“…The objective of the present study is to investigate the relationship between changes in payout methods and changes in investor tax preference parameters since the introduction of dividends tax in South Africa during 2012. Accordingly, this study will investigate how companies respond when faced with the conflicting tax preferences of investors -which could be of interest to researchers, investors and those charged with fiscal responsibility (Badenhorst 2017). An understanding of investors' preferences and corporate payout behaviour is further submitted as a prerequisite to efficient policy formulation (Chazi, Theodossiou & Zantout 2018).…”

A trio of infectious diseases and pulmonary embolism: A developing world’s reality

“…Coronavirus disease (COVID-19) infection is associated with increased prevalence of venous thromboembolism and pulmonary embolism (PE). 1 , 2 , 3 , 4 , 5 Pulmonary embolism carries a high morbidity and mortality burden, and a high index of suspicion for underlying PE must be maintained in all COVID-19 infected patients. Hypercoagulability in COVID-19 infection occurs either because of altered haemostasis, severe inflammation, endothelial dysregulation or disseminated intravascular coagulation.…”