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INSEAD Working Paper 2014/20/FIN
This paper uses the 2013 fiscal cliff as a natural experiment to examine how the political affiliation of the CEO affected a firm’s response to an expected increase in personal taxes on dividends. Firms could avoid such additional taxes by paying extra dividends and accelerating dividends in the last two months of 2012. These tax avoiders are compared with a sample that could have easily accelerated dividend payments, but did not. We find that the difference in behaviour between firms that avoid taxes and firms that do not, but could have, is explained by the CEO’s political sympathies: Republican CEOs are more likely to help their investors to save money on income taxes. However, other effects seem to be more significant, such as: the consequences for the CEO’s personal wealth as well as the percentage of insider holdings. Larger firms are also more reluctant to engage in avoiding taxes for “the rich”, possibly indication reputational concerns.