Which Types of Firms React More to a Tax Cut? Evidence from the 2003 Dividend Tax Cut

Tat-kei Lai, Travis Ng

Research output: Contribution to conferencePaperResearchpeer-review


The agency model of Chetty and Saez (2010) predicts that firms with stronger shareholder rights and a better market for corporate control are more responsive to a dividend tax cut in their dividend and investment policies. We test these predictions by exploiting the sudden and significant dividend tax cut following the Jobs and Growth Tax Relief Reconciliation Act of 2003 and the pre-tax cut variations in the firms’ governance indexes (the Corporate Governance Index constructed by Gompers, Ishii, and Metrick, 2003, and the Entrenchment Index constructed by Bebchuk, Cohen, and Ferrel, 2009). We find that firms with lower governance indexes raise dividends and reduce investment in response to the tax cut significantly more than firms with higher governance indexes. These differential reactions come from differences in corporate governance standards but not differences in ownership concentration ratios.
Original languageEnglish
Publication date2013
Number of pages37
Publication statusPublished - 2013
EventEuropean Economic Association & Econometric Society 2013 Parallel Meetings - Gothenburg, Sweden
Duration: 26 Aug 201330 Aug 2013


ConferenceEuropean Economic Association & Econometric Society 2013 Parallel Meetings
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