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Dividend Policy and Income Taxation (2008)
| Citations: | 2 - 0 self |
BibTeX
@MISC{Leroy08dividendpolicy,
author = {Stephen F. Leroy and Harry Deangelo and Marek Kapicka and Oddgeir Ottesen},
title = {Dividend Policy and Income Taxation},
year = {2008}
}
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Abstract
The e¤ects of dividend and capital gains taxes on optimal dividend payout policy are analyzed in the context of a one-good model (so that capital consists of stored units of the consumption good). The aftertax discount factor is as-sumed to adjust to taxes to bring about equality between the discounted value of the rms aftertax dividend stream under the optimal dividend policy and the number of units of capital the rm is operating. A standard result that the Miller-Modigliani dividend irrelevance proposition applies in the presence of taxes if the dividend tax rate equals the capital gains tax rate (and if capital gains are taxed as they accrue) is demonstrated. The analysis is extended to deal with unequal tax rates. The two major results are (1) allocating retained earnings to share repurchases has the same tax implications as allocating re-tained earnings to new investments, and (2) either of these will be optimal if and only if the tax rate on capital gains is lower than that on dividends. JEL codes G1, G3. The Miller-Modigliani [14] dividend-irrelevance principle asserts (among other propositions) that, in the absence of frictions, corporate dividend policy does not af-fect rm value. This is so because if investment is held constant, as Miller-Modigliani assumed, then by an identity a change in dividends is o¤set one-for-one by a change in proceeds from new security issues. Assuming that investors value rms by discount-ing payments to stockholders net of proceeds of new issues, rm value is una¤ected by the dividends change. A related dividend-irrelevance proposition, often incorrectly attributed to Miller-Modigliani, may apply if investment is not held constant: variations in future divi-dends do not a¤ect rm value provided that retained earnings are invested in zero-net-present-value projects. This invariance is held to occur because the direct e¤ect on rm value of an increase in current dividends increase is exactly o¤set by lower
Keyphrases
dividend policy income taxation rm value capital gain corporate dividend policy dividend stream share repurchase unequal tax rate dividend-irrelevance principle asserts future divi-dends dividend tax rate equal one-good model consumption good related dividend-irrelevance proposition optimal dividend policy tax rate standard result af-fect rm value miller-modigliani dividend irrelevance proposition applies re-tained earnings stored unit new investment capital gain tax direct ect zero-net-present-value project capital gain tax rate retained earnings stockholder net discount-ing payment optimal dividend payout policy new security issue investor value rms ect rm value major result current dividend increase aftertax discount factor tax implication new issue
