The effects of a tax dividend cut on payout policies: Canadian evidence

Manon Deslandes (Department of Accounting, University of Québec at Montréal, Montréal, Canada)
Suzanne Landry (Department of Accounting Studies, HEC Montréal, Montréal, Canada)
Anne Fortin (Department of Accounting, University of Québec at Montréal, Montréal, Canada)

International Journal of Managerial Finance

ISSN: 1743-9132

Publication date: 2 February 2015

Abstract

Purpose

The purpose of this paper is to examine whether the significant dividend tax rate reduction for individual investors in Canada in 2006 affected firms’ payout policies.

Design/methodology/approach

Using regression models, the authors examine the impact of the 2006 dividend tax cut on dividends and share repurchases in Canadian listed firms from 2003 to 2008. The authors also ran a multinomial logit regression to examine choices between payout policies.

Findings

Following the tax cut, firms increased their dividend payouts, with larger increases for firms in which shareholders benefited from the reduced tax rate. However, the 2006 tax cut appears to have had no negative effect on distributions through share repurchases. After the 2006 dividend tax cut, firms owned by shareholders subject to dividend taxes were more likely to use a combination of distribution mechanisms than share repurchases only, dividends only, or no payouts.

Practical implications

Shareholders’ tax preferences are an important factor for firms to consider when designing payout distribution policies. Following the 2006 dividend tax cut, firms increased their dividend payouts.

Social implications

The findings provide tax regulators with insight into how firms react to tax reform. They suggest that firms adapt their payout policy in the face of: a noteworthy dividend tax cut (6.2 per cent); a dividend tax cut that does not encourage tax arbitrage; and a dividend tax cut that does not economically favour dividend payment over share repurchases.

Originality/value

The paper considers the 2006 dividend tax rate cut in Canada, which presents a number of significant features that allow capturing the effect of a tax cut on payout policies.

Keywords

Acknowledgements

The authors gratefully acknowledge funding provided by the Roland-Chagnon Professorship of Accounting and Taxation, HEC Montreal, and the Université du Québec à Montréal.

Citation

Deslandes, M., Landry, S. and Fortin, A. (2015), "The effects of a tax dividend cut on payout policies: Canadian evidence", International Journal of Managerial Finance, Vol. 11 No. 1, pp. 2-22. https://doi.org/10.1108/IJMF-05-2014-0081

Publisher

:

Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

To read the full version of this content please select one of the options below

You may be able to access this content by logging in via Shibboleth, Open Athens or with your Emerald account.
To rent this content from Deepdyve, please click the button.
If you think you should have access to this content, click the button to contact our support team.