Research

Investor protection, taxation and dividends

In this article Mohammed Alzahrani and Meziane Lasfer test the impact of taxes and governance systems on dividend payouts across countries. This research demonstrates that, when the classical tax system is implemented, firms in countries where there is strong investor protection pay lower cash dividends than in countries where protection is weak. However it is also shown that they repurchase more shares to maximise their shareholders' after-tax returns. In countries where there is weak protection, cash dividends and repurchases are low and less responsive to taxes. The results suggest that when investors are protected they weigh the tax cost of dividends against the benefit of mitigating the agency cost. When they are not protected, they will accept whatever dividends they can extract, even when this entails high tax costs.

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