Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Dividend payout ratio, tax rates, and share

Vol.28, No.4, December , 40–60



  •   (Department of Economics, Konkuk University)

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Abstract  

This paper examines whether the legalization of share repurchase in 1982 by the U.S. Securities and Exchange Commission had a significant impact on the relationship between dividend payout and dividend tax preference, which measures tax rates on dividends relative to tax rates on capital gains. A bi-variate time series model of dividend and dividend tax preference is employed in which the dividend payout ratio relates to the mean of dividend tax preference, which follows a three-state Markov regime switching process, and depends upon the legitimacy of share repurchase. For the period covering 1929-2011, which covers multiple large changes in tax rates, we find that stock buybacks have a significant impact on the relationship in the high mean regime of dividend tax preference. This result suggests that share repurchases are a close substitute for cash dividends.


Keywords
   share repurchase, dividend payout ratio, tax rates, Markov switching model

JEL classification codes
   G35
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