Tuesday, December 8, 2015

Political Affiliation and Dividend Tax Avoidance: Evidence from the 2013 Fiscal Cliff

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Journal of Empirical Finance 35 (2016) 136-149

This paper uses the 2013 fiscal cliff as a natural experiment to examine how the political affiliation of the CEO affects 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 of firms that did not accelerate the payment of their first quarterly dividend from the first three months of 2013 to November or December 2012 (the deliberate tax payers). Ceteris paribus, Republican CEOs are more likely to help their investors to save money on personal income taxes. However, the political affiliation has explanatory power in addition to previously documented effects (Hanlon and Hoopes (2014)), such as the consequences for the CEO’s personal wealth as well as the percentage of insider holdings. Reputational concerns about “avoiding taxes for the rich” as well as corporate governance quality are also significant determinants of corporate behaviour.