Taxes, earnings payout, and payout channel choice

Abstract

JEL classification: G28 G30 G35 G38 a b s t r a c tWe study the tax regulations in relation to dividends and capital gains over the last two decades for the UK in order to determine whether changes in tax regimes affect corporate payout policy (dividends, share repurchases, or a combination). While we can identify investors' tax-driven preferences for a specific payout channel, we find no evidence of taxinduced clienteles. Firms do indeed not cater to the tax preferences of their shareholders (including individuals, pension funds, corporations). Other factors, such as equity-based compensation received by the CEO and investor sentiment in the form of optimism reduce the dividend payout and increase the use of share repurchases.'But in the real world there remains one overwhelming reason why dividend policy is not irrelevant: tax. The way dividends are taxed can have wide-ranging consequences for how a firm is run. In particular, it can influence whether a firm finances itself primarily through equity or debt, and how it chooses to return profits to its shareholders.' (The Economist, 9th January 2003) 'In Britain Gordon Brown staged an infamous pensions tax "grab" in 1997, which reduced private pension funds' income by around £5 billion (then $8.4 billion) a year by eliminating the tax credit on dividend payments.' (The Economist, 2nd December 2010) 'In America dividends seemed to go out of fashion in the 1990s. A yield of 2% or so appeared trivial when the market was rising by 20% a year. The disrespect for dividends also reflected the belief that, for tax reasons, share repurchases were a better way of returning cash to investors.' (The Economist, 2nd September 2010)

The Effect of Shareholder-Level Taxes on Organizational Form and Stock Ownership: Evidence from Equity Carve-Outs of Master Limited Partnerships

“…Using U.K. tax law changes which had varying effects across different types of investors (e.g., individuals, pensions, etc. ), Geiler and Renneboog (2014) find no evidence of catering or sorting based on shareholder-level taxation of corporate payouts. Howard, Pancak, and Shackelford (2014) exploit a tax law change for foreign investors in U.S. firms which resulted in varying tax rates based on the investor's home country.…”

Executive Remuneration and the Payout Decision

“…In contrast, Michaely, Thaler, and Womack () demonstrate that changes in payout policy do not necessarily lead to adjustments in ownership concentration and structures. Geiler and Renneboog () calculate the after‐tax values of £1 in dividends and in share repurchases for different types of investors and thus infer the preferences of individuals and families, pension funds, and corporations regarding the payout method. They show that, from a tax perspective, individuals preferred share repurchases over dividends during the period 1996–2007, pension funds preferred dividends before 1997 but became subsequently tax‐neutral, and corporations (including financial firms) preferred dividends during the whole time window of the past 20 years.…”

“…This distribution element is defined as the difference between the market value of the repurchased shares and the book value of the corresponding paid‐in capital. It is important to note, however, that the sole repayment of capital does not form a distribution (Geiler & Renneboog, ). The tax treatment of share repurchases depends on the type of recipient: individuals selling their shares in an open‐market repurchase are subject to capital gains tax on the amount exceeding their exemption .…”

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

“…The plasma D-dimer test has a low specificity and can be raised in a multitude of conditions including HIV-infection, TB, VTE, PE, COVID-19, pneumonia and increased age. 15 , 16 , 17 , 18 This limited its use in differentiating between the four coexistent medical conditions in our patient, all of which are known to cause elevations in D-dimer levels. This highlights the complexity of diagnosing PE in the context of HIV, TB and COVID-19 infection.…”