Download Dividends and Shareholder Taxes: Evidence from Tax Reform

Dividends and Shareholder Taxation:
Evidence from Canada∗
Andrew Bird†
Tepper School of Business
Carnegie Mellon University
July 31, 2013
Abstract
The effect of dividend taxes on dividend payments is a topic of considerable debate
with repercussions for the cost of capital and investment. The traditional view of
dividends suggests that dividend taxes lead to lower dividends, a higher cost of capital
and so lower investment. In contrast, according to the new, or trapped equity, view,
dividend taxes are neutral to dividend payout, the cost of capital and investment. I
test these theories using firm-level panel data surrounding a recent policy change in
Canada. This reform cut the shareholder-level tax rate on dividends for top tax bracket
investors by about 40%. Analysis of discrete dividend events (initiations, terminations,
increases and decreases) suggest little effect from the dividend tax cut, in stark contrast
with recent evidence from the United States. Difference-in-differences estimates using
control groups comprised of firms which were exogenously unlikely to be affected by
the reform suggest a small positive effect on net dividend initiations. Finally, fixed
effect models of the level of regular dividends, which are highly concentrated among
the largest payers, show some evidence of an increase around the reform. However,
the type of firms responding casts serious doubt on taxes as the explanation for this
phenomenon. These results are consistent with the small and open nature of the
Canadian economy, and have important consequences for the effects of globalization
on shareholder taxation.
∗
I would like to thank Michael Smart, Robert McMillan, Laurence Booth and Alex Edwards for their
guidance and support throughout this project. I gratefully acknowledge financial support from the SSHRC
CGS Doctoral Fellowship, the Dorothy J. Powell Graduate Scholarship in International Economics and the
Royal Bank Graduate Fellowship in Public and Economic Policy. All omissions and errors are my own.
†
E-mail: [email protected].
1
Introduction
The effect of shareholder taxation of dividends on corporate dividend payout is an open question with important ramifications for efficiency and equity in tax policy. Since dividends are
earned disproportionately by the wealthy, dividend taxes may have desirable distributional
implications. However, these may be accompanied by significant inefficiencies. The traditional source of inefficiency comes from the fact that income earned by a corporation is
already taxed at the corporate level, and so taxing it again at the shareholder level implies
double taxation of this income. Because of this double taxation, a rational investor will
require a higher rate of return from investing in the equity of a corporation, which leads to
a higher cost of capital for the firm, and so less investment. The agency model of the firm
identifies another possible issue associated with dividend taxation. If such taxes discourage
payout, free cash flow may be retained in firms where it can cause, for example, wasteful
empire building by managers (Jensen [1986]). Finally, differential taxes at the investor level
can have implications for optimal risk diversification. Rather than allocating ownership according to the ability and desire to bear risk, these tax differences may be driving ownership
decisions.
I use a recent cut in shareholder dividend taxes in Canada to provide evidence on the
effect of dividend taxes on dividends, which in turn has important implications for the effect
of dividends on the cost of capital and investment. In particular, theoretical models of the
firm predict that investment will move in the same direction in the long run as dividends. In
line with this idea, the avowed aim of the tax cut was to “encourage savings, investment and
economic growth (Budget 2006).” I find only limited evidence for any successes of the policy
along these margins. Decomposing the data to allow for separate intensive and extensive
effects of the policy yields treatment estimates that are not economically significant relative
to the existing flow of dividends or stock of dividend payers. However, this lack of effect could
be driven by confounding secular trends and so suggest a difference-in-differences strategy
to account for such time-varying factors. Two control groups are used, both of which would
2
be a priori unlikely to respond to the reform. First, large shareholders who were not eligible
for the reform due to being resident outside of the country or because of the inter-corporate
dividends received deduction might be expected to influence the firms in which they invest
against responding to the reform. Second, firms inter-listed in the United States are likely
catering to investors in that country, who likewise did not enjoy the benefits of the reform.
Evidence from these control groups is mixed, with no differences seen between the inter-listed
and not inter-listed groups, but a small positive effect on net dividend initiations using the
ineligible shareholder classification. These findings are robust to changes in the sample, the
set of controls and the presence of group-level time trends.
For policy and revenue forecasting purposes, the aggregate level of regular dividends is
also important and may behave much differently than discrete dividend-changing events.
Hence the second part of the analysis focuses on the regular dividend payments themselves,
which are dominated by a small number of large payers. I find some evidence, using fixed
effect models to capture the persistence of dividend payout, for an increase in regular dividends around the reform. However, any increase seems to be driven primarily by inter-listed
firms, making it unlikely that the Canadian tax change is driving the changes in their payout
behaviour. Furthermore, these firms also increased their share repurchases, the taxation of
which did not change around the time of the reform. Overall, these findings are somewhat
in tension with the extant empirical literature discussed below.
These results also provide evidence in the debate between the new and old theories of
dividend payout, which are clearly described in Auerbach. The key distinction between the
two theories is the source of finance for marginal investments. The traditional view suggests
that new equity is the marginal source of finance. When an investor decides whether to inject
equity into a firm, he rationally considers the tax that will be due when his investment pays
dividends. Hence, a dividend tax will increase the required rate of return, or cost of capital,
for the firm. Firms will respond to this increased cost of capital by decreasing investment.
This decrease in investment will lead to a fall in dividend payments in the long run. However,
3
the old view actually predicts that no dividends will be paid while the marginal source of
finance is new equity, since any payout would require an increase in new equity. To address
this deficiency, the theory has been augmented to include a direct contemporaneous benefit
to paying dividends. For instance, dividends can be used for signaling (Miller and Rock
[1985]) or to mitigate agency problems due to excess cash held in the firm. In these cases,
a dividend tax will not only increase the cost of capital but will also cause current dividend
payments to be inefficiently low, since these extra benefits of dividends cannot be accessed
without triggering the tax.
On the other hand, the new view is built on the observation that most new equity
financing comes from retained earnings rather than new share issues. Once the marginal
decision becomes how to use the equity already contributed to the firm, the dividend tax
becomes irrelevant. This is because the equity inside the firm is trapped, in the sense that
it will trigger the dividend tax whenever it is distributed. Hence, the dividend tax is a
lump sum tax on corporate equity and does not affect the cost of capital or investment.
Auerbach and Hassett [2003] identify some circumstances in which dividend taxes could still
have an effect even within the new view paradigm. The most important case is that of a
temporary dividend tax cut, whereby firms would adjust the timing of their dividends to
take advantage of the lower rate, without changing their overall payout.
A different explanation for a limited effect of payout taxes in the context of this paper
is that the marginal investor in the Canadian market may not have been affected by the
Canadian reform. This could be because the marginal investor, as in a Miller-type clientele
model (Miller [1977]) is tax-exempt or perhaps located in the United States. However,
the tax-adjusted capital asset pricing model (see Brennan [1970] or Bond et al. [2007] for a
related application) provides a different perspective on the issue. This model incorporates
a risk diversification motive and so yields an equilibrium where all investors hold every
security, even in the presence of differential taxation. The relevant tax rate for each security
is a weighted average of the marginal tax rates of different investors. This view suggests that
4
the tax cut ought to have had an effect in the Canadian market, though this effect could
be potentially very small, in proportion to the fraction of savings held by taxable Canadian
investors relative to all savings potentially available. In fact, the prevailing view, since at
least Booth [1987], is that the Canadian capital market is segmented, where some investors
and companies access international markets and some do not.
1.1
Empirical Evidence
Much of the recent empirical evidence addressing the dividend theory debate comes from
studies of the Job Growth Taxpayer Relief Reconciliation Act of 2003 in the U.S., which
cut the maximum rate of personal tax on dividends from 35% to 15%. Chetty and Saez
[2005] find a significant positive effect on dividend payout from this reform throughout the
six quarters after the reform. They interpret this finding as supportive of the traditional
view of dividends and in fact, Dhaliwal et al. [2007] find that the 2003 reform did decrease
the cost of equity capital. In line with this result, Campbell et al. [2011] associate the
reform with increases in corporate investment and Lin and Flannery [2013], with decreases
in firm leverage ratios. Blouin et al. [2011] jointly model the firm’s investor composition and
payout choice, finding that directors and officers adjusted their portfolios in response to the
reform, at the same time as firms themselves reacted to the change in tax incentives. On
the other hand, recent research casts some doubt on the striking findings of Chetty and Saez
[2005] and the literature that followed; in particular, Edgerton [2012] provides four distinct
pieces of evidence mitigating the apparently large response to the 2003 reform, including
that dividends from real estate investment trusts, which were not eligible for the reform,
increased by a similar amount.
An alternative way to study this reform is the aggregate time series methodology of
Poterba [2004]. He models aggregate dividend payout as a function of the level and lags
of corporate profits and a parameter measuring the tax preference for dividends relative to
capital gains, finding a positive elasticity consistent with the old view. According to the
5
model, the effect should be seen only in the long run, and so is difficult to reconcile with
large, immediate effects.
There is also a fair amount of recent international evidence. Jacob and Jacob [2012] is
a large cross-country study of the effect of taxes on corporate payout for 6,035 firms from
25 countries1 over the period 1990-2008. They find that the tax penalty on dividends over
repurchases has important predictive power for that choice. Alstadsæter and Fjærli [2009]
study the introduction of a shareholder tax in Norway in 2006 which increased the top
marginal tax rate on dividends from 0% to 28% and find substantial intertemporal shifting
around the reform for non-listed firms.
Concerning the Canadian evidence in this debate, McKenzie and Thompson [1996] is
a useful survey. They note that most older studies using Canadian data find significant
effects of tax policy on equity prices, suggesting that regardless of the prevailing dividend
theory, Canadian tax policy can indeed affect the marginal investor in the Canadian market.
For example, McKenzie and Thompson [1995] study a tax reform from 1986, which had
the effect of increasing the effective tax rate on dividends. They find significant negative
effects on the prices of high dividend-yield stocks, which are consistent in magnitude with a
clientele consisting of top tax bracket individual investors. More recently, Dutta et al. [2004]
study ex-dividend day price drops and find evidence consistent with a significant effect of
dividend taxes on share prices. Perhaps most closely related to my study, Kooli and L’Her
[2010] look at the changing pattern of dividends and repurchases from 1985-2003 in Canada
which reveals a shift in payout from dividends to repurchases. Their explanation for this
phenomenon is the relative benefit of repurchases for financial flexibility.2 Canadian evidence
of a different type comes from a survey of managers undertaken by Baker et al. [2012]. They
report that taxation is no more than a second-order determinant of dividend policy and that
share repurchases are not used as a substitute for dividends.
1
The sample includes 248 Canadian firms for an average of 5 years each.
They also find that the decrease in the capital gains inclusion rate in 2000 was associated with an increase
in the propensity to repurchase shares.
2
6
The structure of the paper is as follows: Section 2 describes the structure of dividend
taxation in Canada and the 2006 reform, Section 3 presents the data, while Sections 4 and
5 develop the empirical analysis of dividend events and levels, respectively, and Section 6
concludes.
2
Dividend Taxation in Canada
The personal income tax system in Canada has, since 1972, partially integrated corporate
and personal income taxation through a ‘gross-up and credit’ system of dividend taxation.
The effective tax rate on dividends for an investor i, mi , generated by such a system is as
follows:
mi = τ + (1 − τ )(1 + G)(ti − c)
(1)
where τ is the corporate tax rate, G is the rate of the gross-up, ti is the investor’s marginal
tax rate (federal plus provincial) and c is the rate of the dividend tax credit (DTC). The
income is earned at the corporate level, where it is taxed at the corporate income tax rate.
What remains after this tax is paid is the amount of the dividend paid to the investor.
The gross-up is then applied to the dividend and this grossed up amount is included in the
investor’s taxable income. To get full integration, the gross-up should be set to
1
1−τ
so that
the full pre-tax amount of the dividend is included in personal income, and the rate of the
dividend tax credit should be set to τ to exactly offset the tax already paid at the corporate
level. If this were the case then the effective tax rate on dividends for a particular investor
would be the same as her marginal tax rate on ordinary income.
Prior to 2006, the rate of gross-up was 25% and a federal tax credit of 13.33% of this
amount was accorded. These specific rates led to approximately full integration for dividend
income flowing from small businesses, which are eligible for a lower rate of corporate income
7
tax.3 For large businesses, this particular gross-up and credit led to underintegration, raising
concern about double taxation of corporate income.
The dividend tax reform of 2006 (the so-called enhanced dividend tax credit) increased
the gross-up rate to 45% and the federal credit rate to 18.97% on dividends paid by large
corporations. This enhanced dividend tax credit yields roughly full integration for large
corporations, and preserves full integration for small businesses (by using the old grossup and credit rates for such firms). The effect of this reform was to decrease the total
effective tax rate on dividends for a top tax-bracket investor in Ontario from about 55% to
46%.4 Overall, the tax reform significantly decreased the taxation of dividends for taxable
Canadian investors, leaving it unchanged for tax-exempt Canadian investors (including other
corporations) and foreign investors.
Since the object of this study is the effect on corporate payout of the reform, it is important to carefully consider the timing and predictability of the change. The enhanced dividend
tax credit was proposed by the Liberal government on November 23, 2005, principally in response to the rise of income trusts. This business structure, under which distributed income
was taxed only at the shareholder level as ordinary income, had been tax-advantaged relative
to the corporate form because of underintegration. Corporate conversions to income trusts
were an increasing policy concern, mainly because of the associated tax revenue losses.5 The
enhanced dividend tax credit was partially meant to level the playing field by lowering the
effective tax burden on corporations without changing the tax treatment of income trusts.6
3
The special deduction for small businesses that yields this lower rate is completely phased out at $15M
of taxable capital so is not relevant for the publicly traded companies analyzed in this paper.
4
This calculation uses equation (1) and follows the budget proposal’s assumptions of a notional corporate
tax rate of 32% by 2010, with the combined federal and provincial credit rate increasing from 18.46% to
32%, along with the gross-up going from 25% to 45%.
5
Mintz and Richardson [2006] estimated an annual revenue loss from income trust conversions of $700M,
consisting of a $1.8B decrease in corporate tax revenues partly offset by a $1.1B increase in personal tax
revenue.
6
McKenzie [2006] describes the economics and structure of income trusts in much more detail. Likely
because the enhanced DTC did not effect foreign or tax exempt investors, this reform did not have the
government’s desired chilling effect on income trust conversions. Hence on October 31, 2006, a new tax
regime for income trusts, the specialized investment flow-through regime, was announced, whereby they
would be effectively taxed at the same level as corporations starting in 2011. This led most income trusts
to convert back to corporations, as the tax advantage had been eliminated, while non-tax costs of this form,
8
There is ample reason to believe that this original proposal was a surprise to investors.
In fact, a controversy ensued over whether the details of the proposed reform had been
leaked several hours prior to the announcement, due to a suspicious pattern and volume
of trading. This implies that market participants were surprised by the information and
so acted to adjust their portfolios. However, before the legislation could be passed, the
election in January of 2006 led to a change in government. That said, the two parties with
a reasonable chance to form the next government (the incumbent Liberal Party and the
Conservative Party) were both committed through campaign promises to following through
on the enhanced dividend tax credit proposal. The new Conservative government indicated
it would follow through immediately in the Budget 2006 speech of May 2, 2006, and proposed
draft implementation legislation in June of 2006, with retroactive effect to the beginning of
2006. Throughout 2006, the provinces separately indicated their intention to increase their
own dividend tax credits in line with the federal legislation, and ended up doing so.
For example, the province of Ontario detailed its enhanced DTC proposal on August 3,
2006. This plan followed the new federal rules for gross-up of eligible dividends and increased
the rate of the dividend tax credit from 5.13% to 6.5%, also retroactive to the beginning
of 2006, with plans to increase the credit rate to 7.7% by 2010. At such rates, the Ontario
dividend tax credit would provide for full integration with a provincial corporate tax rate of
12%, which was the preferential rate applied to manufacturing and several other industries.
Overall, it seems likely that the enhanced dividend tax credit was not anticipated prior
to the end of November of 2005, but that thereafter, corporations put a very high degree of
probability on a decrease in the effective tax rate on dividends. Furthermore, the enhanced
dividend credit appears now to be a permanent feature of the tax system, as changes to the
rate of gross-up and credit have already been announced to maintain the present level of
integration as the corporate tax has fallen through 2012.
Given the significant attention paid to the recent U.S. dividend tax cut, it is useful
such as increased agency costs from a less developed legal framework, remained.
9
to compare the impacts of the two reforms on effective tax rates. Prior to the U.S. reform,
dividends were first taxed at the corporate level and then again at the investor’s full marginal
tax rate. The tax reform of 2003 cut the tax at the investor level to a flat 15% for highincome investors (or 5% for sufficiently low-income investors). This meant that the weighted
average tax rate on dividends (not including the corporate tax) fell from 29% to 17%, which
corresponds to a 40% cut. For comparison, the Canadian reform cut the top marginal tax
rate on dividends in Ontario from approximately 34% to 20%7 which is a drop of similar
magnitude.
3
3.1
Data
Corporate Payout
Data on dividends come from the Canadian Financial Markets Research Center (CFMRC),
which covers all public companies listed on the Toronto Stock Exchange. The price adjustments file consists of daily records of dividend payments, among other events, such as
stock splits. To generate a dividend time series for each company, the dividend records were
aggregated up to the year level by stock symbol and usage code, which uniquely identifies
an issuer. This procedure allows for a company to have multiple classes of common stock.
Following the literature, only dividends on common shares, rather than preferred shares,
are included. The benefit of the CFMRC data over accounting data from Compustat is
the ability to distinguish between regular and special dividends. Data on share repurchases
come from Compustat and are calculated following the algorithm of Grullon and Michaely
[2002], which is described in Appendix A, along with the rest of the variable definitions. The
7
The tax rate immediately dropped by approximately five percentage points, with the further reductions
to follow as provinces matched the federal government’s increase in dividend tax credit rates. Though this
was the announced change when enacted in 2006, the actual shareholder dividend tax rate in Ontario did
not end up falling by the amount originally envisaged by the federal government. This happened because
Ontario did not continue to increase its credit rate after 2007; however, two other large provinces (British
Columbia and Alberta) both achieved approximately full integration by 2008.
10
firm-year is the unit of analysis throughout this study. All dollar values are deflated to 2010
Canadian dollars using the consumer price index (and the relevant Canada-U.S. exchange
rate for companies which report in U.S. dollars).
The main sample displayed in the descriptive graphs and in the econometric analysis
drops financial and utility companies, following Fama and French [2001] and the subsequent
literature.8 Furthermore, foreign-based firms are dropped, based on the classification in the
CFMRC database, the necessary accounting control variables must be available, and finally,
firms which were ever income trusts are dropped. The latter two restrictions are discussed
in more detail below.
Figure 1 shows the time series of corporate payout in Canada from 1995-2010. It is split
into three components: regular dividends, special dividends and share repurchases. First,
the graph demonstrates that special dividends are not generally an important component
of payout.9 Regular dividends and share repurchases are of similar magnitude and make up
the bulk of corporate payout. Repurchases are shown mainly as a point of comparison with
dividends, but are not the main object of this study.10 As is well known in the literature,
regular dividends are much more stable and persistent than share repurchases. In particular,
the firm-level correlation between regular dividends and its lagged value is .93; the equivalent
value for repurchases is .60. The contrast between the two is clear in 2009, as the worsening
financial crisis appeared to cause a much larger drop in repurchase activity than in dividends.
The vertical line between 2005 and 2006 indicates when the enhanced dividend tax credit
reform took place. The reform does not appear to have had much effect on the aggregate
time series, with regular dividends continuing an upward trend through the reform.
The aggregate regular dividend time series is driven by the largest dividend payers, given
8
Specifically, firms with first digit SIC of ‘6’ (financials) and first two digits of ‘49’ (utilities) are dropped.
The typical argument given in favour of this restriction is that these firms follow a fundamentally different
payout strategy, particularly because of government regulation. Additionally, the share repurchases variable
cannot be calculated for such companies, due to financial reporting differences.
9
The small spike in 2005 is due to a special dividend paid on restructuring by one particular company
(Sears).
10
Note that repurchases are taxed as capital gains, the taxation of which did not change as part of the
2006 reform.
11
the extreme concentration of regular dividend payments.11 Hence, the payout behaviour of
the vast majority of firms is obscured in the aggregate data. A common way to address
this issue is to investigate the propensity to pay dividends at all. This effectively weights
all companies equally and so provides more information to learn about the determinants of
corporate payout. Figure 2 depicts the fraction of firms paying any regular dividends, any
special dividends, or making any share repurchases, respectively, over time. Note that using
the fraction of payers, rather than the raw number, accounts for the fluctuating sample size
over time due to firm entry and exit.
The time series of regular dividend payers reveals a rather different story. This fraction is
fairly stable in the years prior to the reform and appears to fall slightly from 2005-2007, which
implies that the run-up in the aggregate time series was driven by changes on the intensive
margin. Notably, a similar downward long-run trend in dividend payers was documented by
Fama and French [2001] in the U.S., where the fraction of dividend paying firms fell from
about 67% in 1978 to 21% in 1999.
The preceding graphs depict payout behaviour through 2010; however, in all of the analysis that follows, the sample ends prior to 2008. This is done for several reasons. The financial
crisis could have involved a structural break in dividend behaviour, and substantial federal
corporate statutory income tax rate cuts began in 2008, causing the rate to fall by about a
third over the subsequent four years.
3.2
Control variables
To isolate the effect of the tax reform, it will be important to control for other time-varying
influences on dividend payout. The starting point is to account for firm-level changes with the
possibility of secular changes to dividend strategies discussed in a later section. To that end,
the CFMRC data are merged with Compustat using the company’s 6 digit CUSIP code. The
required control variables are income before extraordinary items, to measure profitability,
11
The top decile of regular dividend payers covers 94% of the total in my sample while the top percentile
covers 44%.
12
market capitalization and total assets to control for firm size, and the market-book ratio
and asset growth rate from year t − 1 to t to account for growth and growth opportunities,
which might substitute for dividends. Furthermore, cash holdings are used to control for
changes in the availability of resources with which to pay dividends to shareholders.12 Table
1 provides descriptive statistics for the payout and control variables.
3.3
Income Trusts
As mentioned in the tax reform discussion, income trusts were a tax advantaged business
form of increasing importance in the mid-2000s13 , characterized by their very high payout
to their investors. This phenomenon can have two kinds of effects on the analysis of regular
dividend behaviour around the 2006 reform. First, since firms which were ever income trusts
are dropped from the analysis, the sample of firms available to respond to the reform is
different than it would be in the absence of the income trust structure. Hypothetically, the
corporations which converted to income trusts may have responded more or less to a dividend
tax cut than those which did not. On one hand, converters demonstrated the salience of
taxes to their decision making and their high payouts imply that they are certainly at the
margin of increasing them. On the other hand, given the necessity for income trusts to
distribute essentially all their profits every year, income trust adopters tended to be mature
companies, which would finance themselves out of retained earnings. This fits the new view
paradigm of dividend taxation, so that these firms might be expected not to change their
behaviour in response to a dividend tax cut. The net effect of these two arguments is unclear,
but important to keep in mind when interpreting the results in the following sections.
The second type of effect from the rise of income trusts is indirect. As a firm’s competitors
become income trusts and increase their payout to shareholders, it can respond in two
12
The control variables are winsorized at the 1% level to minimize the influence of outliers and measurement
error. This yields a somewhat better model fit in general. However, the payout results are not materially
affected by this adjustment.
13
According to data from Compustat, the income trust share of total market capitalization on the Toronto
Stock Exchange peaked at roughly 15% in 2006.
13
possible ways. The firm may increase dividends if it is trying to cater to the same type of
investors as income trusts. Alternatively, the market may become segmented, with income
trusts appealing to investors who want current income, and corporations cutting or stabilizing
dividends to attract investors looking for future growth. In such a case, more competing
income trusts could actually lead to less dividends paid by corporations. To address these
indirect effects, the level and lag of new income trust inceptions at the first digit SIC industry
level in a particular year is included in the empirical model.
4
Analysis of regular dividend events
The purpose of the models in this section is to analyze the effect of the 2006 dividend tax
cut on dividend payout by Canadian firms. The two main theoretical models make different
predictions for this treatment effect, with the new view suggesting that dividend payout will
be unchanged, and the traditional view suggesting that the tax cut would stimulate dividend
payments.
As pointed out by Chetty and Saez [2005], it is difficult to estimate robust treatment
effects using regular dividends as the outcome variable. One problem is the obvious persistence in this variable, but perhaps more importantly, aggregate dividend payments are
driven by a relatively small number of large payers, with most firms not paying dividends at
all. This makes the treatment effect very sensitive to small changes in the specification and
sensitive to outliers. However, for forecasting the aggregate effects of a dividend tax cut, the
effect on these large payers is of primary importance, and will be investigated in Section 5.
To avoid this issue, it is helpful to start with the decomposition of dividend changes
into discrete changes on the extensive (dividend initiations or terminations) and intensive
(dividend increases or decreases) margins. Specifically, four dummy variables are encoded14
which equal one when a firm initiates regular dividend payments, terminates them, increases
existing regular dividend payments by at least 20% or decreases them by at least 20%,
14
The definitions of these variables are in Appendix A.
14
respectively.
Figure 3 shows the percentage of firms in the sample initiating, terminating, increasing
or decreasing regular dividends. These time series do not appear to follow a clear pattern
around the reform after 2005. The net entry into the dividend-paying sample, determined
by initiations less terminations, is low throughout the sample period, implying that the
long-run fall in the propensity to pay dividends in Canada is being driven by the entry of
non-dividend payers into the sample. The net number of initiations is actually the highest
in the several years prior to the reform. As can be verified in Table 1, dividend increases
are the most common event by a factor of more than two, and, not surprisingly, dividend
decreases are very rare. The financial crisis seems to have been associated with a large fall
in dividend increases. There is also a noticeable up-turn in initiations and increases in the
last year pictured on the graph, 2010, suggesting the start of a recovery though the main
estimation sample ends in 2007 and so will not address such behaviour.
The first step beyond the graphical analysis is to add in control variables to account for
firm level differences in the drivers of dividend payout over time. To that end, following
Chetty and Saez [2005], I estimate linear probability models15 of the form:
Eventi,t = βXi,t + γP ostRef ormt + δt + ϵi,t
(2)
where Xi,t includes the level and first lag of the firm’s profitability rate, logarithm of total
assets, market capitalization relative to total assets, market-book ratio and cash holdings
relative to total assets, and the firm’s total asset growth rate relative to the prior year. Also
included is a set of dummy variables for first-digit SIC to control for fixed industry differences
and a time trend. Eventi,t is a dummy variable that is equal to unity if firm i undertook a
regular dividend event in year t, where this refers to one of initiations, terminations, increases
or decreases depending on the model.
Table 2 presents the results of estimating Equation (2) for each kind of dividend event.
15
Estimating probit models instead does not materially affect the conclusions.
15
As expected given the graphical analysis, there is little effect of the reform on dividend
events, with the exception of a small and negative effect on regular dividend initiations. The
coefficient of -0.015 implies a fall of about 9 initiations per year, given the sample size in
the year preceding the reform of 604 (of which 149 paid regular dividends). This estimate is
about half of the initiation rate in 2005 of 2.8%. Dividend increases appear to rise following
the reform, though not by enough to attain statistical significance. Still, this opposing
evidence suggests caution in interpreting the fall in initiations as a negative causal effect of
the dividend tax cut. Terminations and decreases do not change following the reform.
The only control variable which seems to have an important positive influence on the
dividend decision is the level and lag of income relative to total assets. As expected, increases
in this variable increase the propensity for a firm to initiate or increase regular dividends. The
positive effect of income on decreases is difficult to interpret given the very low propensity
to decrease regular dividends. The other relatively clear pattern is that falls in market
capitalization, normalized by total assets, predict dividend terminations and decreases. The
trust inceptions variable has no effect in these models.
The last column of Table 2 applies the same model to a dummy variable equal to one if
the firm repurchased any shares, in order to check whether there is any obvious substitution
response. For instance, if share repurchases fell drastically while dividends remained the
same, the fraction of payout from dividends would have increased, which could be interpreted
as a positive treatment effect of the reform. However, this is not the case, as the estimated
effect is very small and statistically insignificant.
One possible source of concern in interpreting the preceding results is that the sample
size is fluctuating as firms enter and exit the data. For comparability of results with the
existing literature, it is useful to define a new estimation sample as the top X firms by
market capitalization in each year, where X is chosen as the number of firms available in the
year with the smallest sample. In addition, the sample is restricted to start in 2002 to keep
16
the number of firms per year,16 and so the number of dividend events, at a high enough level
to detect changes. Specifically, the ‘short’ sample contains 587 firms per year. This shorter
sample also means that the time trend soaks up more secular variation in dividend payout
behaviour. Table 3 replicates Table 2 using this new sample. It is immediately clear that
the results are substantially the same, with initiations still decreasing somewhat following
the reform. The overall picture remains one of no effect and suggests that changes in net
firm entry and exit were not driving the small estimated effects.
4.1
Difference-in-differences
The obvious problem with the results discussed above is that they may be driven entirely by
secular changes in dividend decisions, completely separate from the reform, such as changes
in dividend catering incentives.17 This could mean that a positive treatment effect is counteracted by a negative secular trend. A potential solution to this problem is to identify a group
of firms which would not be expected to respond to the reform for exogenous reasons but may
otherwise employ similar payout strategies, conditional on firm characteristics. There are two
possible candidate types of firms to be used as control groups in a difference-in-differences
strategy.
4.1.1
Presence of large corporate or foreign shareholder
In Canada, foreign investors pay a fixed withholding tax on dividends, based on the relevant
tax treaty with the investor’s country of residence, and are not eligible for the dividend tax
credit. Hence, the preferred payout policy of such investors should not have been affected by
the enhanced DTC. Similarly, pension funds are tax-exempt and so are likewise not eligible
for any dividend tax credit. Finally, corporations themselves can deduct dividends received
16
Changing this starting year does not seem to make much difference to the results.
This idea was introduced by Baker and Wurgler [2004], whereby managers pay dividends when the
market rewards them for doing so. Preliminary investigations of these incentives in the Canadian market,
for instance using the market-book premium of dividend payers relatively to non-payers, yield no obvious
pattern.
17
17
from other corporations for tax purposes, as long as they own at least 10% of the dividend
payer, and so do not get the credit. Hence, any firms with large investors that are part of
one of these groups should not be influenced by the dividend tax cut.18
Therefore, I use data on large shareholders of the firms in the sample from the Financial
Post Corporate Database in 2008 to tabulate the fraction of each firm held by an investor
that is certain to be ineligible for the DTC.19 The first control group in the results below
consists of all firms which have at least one such shareholder owning more than 10% of the
firm. I define the treatment group conservatively, in the sense that ownership data must also
be available for such firms, and show no credit-ineligible shareholders. For simplicity, this
classification will be referred to as the ‘eligible/ineligible shareholder’ classification, where
‘eligible shareholder’ just refers as shorthand to a firm with no ineligible 10% shareholders.
The graphical difference-in-differences analysis of dividend events following this definition
is shown in Figure 4. This figure, and the remainder of the analysis in this subsection, use
the short sample to minimize the measurement error associated with using ownership data
from a particular year, and to keep the sample size at a reasonable level. This sample has
345 firms per year, after the requirement for availability of ownership data. Considering the
volatility of dividend events, the trends across the two groups prior to the reform are not
too dissimilar.20
4.1.2
Inter-listed firms
The second control group consists of Canadian corporations inter-listed in the United States.
Booth and Johnston [1984] found that such firms tend to be priced by investors located in
18
Barclay et al. [2009] study transactions where corporations, which have a tax preference for dividends in
the U.S. as well, acquire large blocks of shares in other firms – they find no evidence that dividends increase
after these events nor that deals target dividend payers preferentially. On the contrary, using Canadian
data, Zeng [2011] finds that membership in a corporate group is associated with increases in dividends and
decreases in share repurchases.
19
Robustness checks using 2005 data from prior to the reform yield very similar results. There was in fact
little portfolio reallocation in response to the reform, at least at the level of 10% shareholdings, of the kind
that might be expected based on the work of Desai and Dharmapala [2011] for the United States.
20
One exception is a noticeable gap for initiations in 2004, which will be addressed in a robustness test.
18
the United States. Since such investors were not affected by the enhanced DTC reform,
we would expect inter-listed firms to be much less likely to respond, even though they face
similar business conditions and institutions as other Canadian firms. Figure 5 illustrates the
graphical dividend event difference-in-differences using inter-listed companies as a control
group. The two groups track relatively closely both before and after the reform for each
type of event. This classification will be referred to as the ‘inter-listing’ classification.
Table 4 contains summary statistics split by the two treatment and control definitions.
This shows that the ineligible shareholder classification is well balanced in terms of size,
though the treatment firms may be more growth-oriented, with lower current profitability
but higher market capitalization and asset growth. The inter-listing comparison yields groups
of firms that are similar in terms of profitability but, as expected given the high fixed costs
of a stock market listing, inter-listed firms are much larger in terms of both total assets and
market capitalization. The final row of Table 4 is reassuring in the sense that a very similar
fraction of firms in each group pay regular dividends, ranging from 28% to 31%.
4.1.3
Results
As before, and especially in light of the compositional differences in the groups, it is important
to control for firm level characteristics. This is accomplished using a linear probability
framework and controlling for a wide set of accounting variables:
Eventi,t = βXi,t + γ1 Eligiblei X P ostref ormt + γ2 N otInteri X P ostRef ormt
+ γ3 Eligiblei + γ4 N otInteri + γ5 P ostRef ormt + δt + ϵi,t
(3)
with X containing the same set of control variables as before. The coefficients γ1 and γ2
yield the estimated treatment effects from the two control strategies described above. Table
5 gives the results.
19
To start, for the eligible shareholder classification, the estimated treatment effect for
dividend initiations is positive and significant at the 5% level, and corresponds to 4.6 more
firms initiating dividends per year after the reform. For terminations, the effect is negative.
Combining these two results yields an estimated increase in initiations net of terminations of
approximately 7 per year. To put this in a larger context, it means that the reform caused
a rise in the number of dividend paying firms of about 10% in total over the two subsequent
years.21 As expected given the graphical evidence, the effect on increases is positive, though
not statistically significant. Since about half of the firms in the sample have a large DTCineligible shareholder, any possible benefit from cutting dividend taxes in this context is
limited, provided this classification is descriptive of actual behaviour.
In contrast, the second row of Table 5 shows that there are no significant differences
around the reform for any of the four dividend events using the inter-listing classification.22
Reassuringly, adding group-specific time trends does not alter these results. Likewise,
estimating the model separately for each classification yields similar results. Inspection of
Figure 4 suggests concern that initiations for the two eligible and ineligible groups diverge
significantly in 2004, but are otherwise quite similar in the pre-reform period. The direction
of the difference mechanically increases the estimated effect of the reform. Redoing the
analysis with 2004 omitted causes a small decrease in the coefficient and an increase in the
standard error so that the effect is no longer statistically significant. However, this omission
does not change the estimated effect on regular dividend terminations.
Overall, the difference-in-differences analysis of discrete dividend events provides some
evidence of a modest treatment effect from the reform among a subset of firms which did
not have large shareholders who could not take advantage of the reform. Since this effect
is not also seen for the inter-listing classification, the evidence is mixed and can support at
21
This calculation comes from the 14 net initiations (7 per year) relative to the 149 firms in the main
sample paying regular dividends in 2005.
22
The ‘triple interaction’ combining the two classifications would be of interest but turns out not to reveal
anything. This is likely due to the small number of dividend events in the overlap of the two treatment
groups.
20
most a small positive effect of cutting dividend taxes on dividend payout.
5
Analysis of regular dividend levels
Analyzing discrete dividend events implicitly weights each firm equally. If the object is to
learn about firm behaviour, this is the correct approach to take, as it makes use of all of
the available data. However, regular dividend payout is highly concentrated, so for assessing
the aggregate outcomes of a tax cut, only the response of a small minority of firms actually
matters.
The first step is to control for observable influences on dividend payout in the firm-level
data making up the aggregate time series seen in Figure 1. This is done in the following
regression:
RegDivi,t = βXi,t + γP ostRef ormt + ωi + δt + ϵi,t
(4)
where X includes the level and first lag of the firm’s income, logarithm of total assets,
market capitalization, market-book ratio and cash holdings, and the firm’s total asset growth
rate relative to the prior year. Also included are firm fixed effects, to capture the strong
persistence in regular dividends,23 and a time trend. The results of estimating this model
are in Table 6.
The first column uses the full sample from 1995-2007 and shows an increase of $4.9M in
regular dividends per firm after the reform, which is quite large compared to the average
dividend payment of $10.5M in 2005. The second column reports a smaller, though still
statistically significant, estimate for the fixed number of firms sample (2002-2007). Given
that Table 2 showed only small changes in dividend initiations and increases around the
reform, this rise in dividend levels must be coming from heterogeneity in those dividend
events. To investigate this point further, the sample in the third column of Table 6 excludes
all firms which were in the top 10% of the size distribution by total assets in 2002. This
23
Estimating lagged dependent variable models using the Arellano-Bond method yields similar conclusions.
21
exclusion completely eliminates any effect from the reform, which demonstrates the extreme
concentration of changes in regular dividends in addition to the aggregate concentration
already documented. As a check for any substitution response away from other types of
corporate payout, the same model is run for share repurchases in the fourth column, using
the short sample. This shows no response to the reform.
The negative coefficient, which is significant at the 10% level, on same industry income
trust inceptions suggests that firms might be responding to the rise of high payout competitors by refocusing on growth, rather than payout. The average number of trust inceptions
by industry is 2.5 in 2005, for example, so this negative effect on dividends is approximately
one million dollars for an average firm in that year. In general, however, interpretation of
the control variables is complicated by the concentration of the dependent variable – since
a small number of firms pays the bulk of aggregate dividends, a small number of firms will
be driving the effects of these control variables.
As Figure 1 shows regular dividends trending upwards possibly before the reform in
2006, there is some concern that the post-reform dummy is picking up the effect of a change
that happened earlier. However, using ‘placebo’ reforms which include 2005 or 2004 in the
post-reform period result in substantially lower estimates.
5.1
Difference-in-differences
A difference-in-differences strategy is also useful in the context of regular dividend levels to
investigate whether this apparent positive effect of the tax cut is causal. Figure 6 shows
the time series in average regular dividends per firm, split by the two group classifications
discussed in Section 4: ineligible shareholders and firm inter-listing. The top panel hints
at a positive treatment effect as both groups track closely together until the DTC-eligible
group starts to increase in 2006. The bottom panel splits the time series into three groups:
majority inter-listing,24 minority inter-listing and no inter-listing. The split within the inter24
This includes companies for which more than 50% of their trading volume (by value) is done outside of
the Canadian market.
22
listed firms turns out to be important in the regression results, which is to be expected given
that the figure clearly shows that the majority group both pays more regular dividends and
saw a large relative increase in 2006 and 2007.
Given the importance of relatively few firms in aggregate payout, it is particularly important to control for firm-level changes. Results from estimating equation 4 with the two
(or three) treatment group interactions used in Section 4 are in Table 7.
In line with the results for dividend initiations, the eligible shareholder classification
yields a positive treatment effect, though in this case it is not statistically significant. The
negative effect seen for the inter-listing classification is likewise not significant. To investigate
further the apparent increase in aggregate, the second column includes an interaction of the
post-reform dummy with a dummy for majority inter-listing, in addition to interaction terms
for the other two treatment groups. This model presents a much different picture. Evidently,
the firms which are increasing their regular dividends as of 2006 are those with a minority
inter-listing, relative to both majority inter-listing and no inter-listing at all. It does not
seem reasonable to attribute this pattern of changes to the dividend tax cut, especially since
a similar pattern is observed looking only at the top size decile of firms. This strategy
significantly reduces the size differences across the three groups, and so the possibility that
such heterogeneity is driving the result. A tax explanation would also be more compelling
if the dividend event analysis had revealed a similar pattern among inter-listed firms, which
it did not.
Another piece of evidence in favour of this interpretation is seen in the third column of
Table 7, which uses all three group interactions to explain share repurchase behaviour. The
pattern of results is almost identical to that for dividends. Hence, minority inter-listed firms
greatly increased both dividends and share repurchases, though the latter by a much greater
amount, even though their tax treatment did not change. This suggests that, conditional on
observable characteristics, this particular group of companies wanted to increase their total
payout for reasons completely independent of the enhanced DTC reform.
23
6
Conclusion
The effect of dividend taxes on corporate payout is an important question in both corporate
and public finance. I use a 2006 tax reform in Canada which substantially cut the shareholder
tax on dividends to provide new evidence to this debate. Making use of control groups made
up of firms which, a priori, would not be expected to respond to the reform, I find evidence
for at most a small, positive effect on net dividend initiations. The aggregate change in
regular dividends following the reform is also positive, but is dominated by a small number
of the largest firms. Since the increase is coming primarily from inter-listed firms which also
increased their share repurchases, the change in tax incentives is very unlikely to have been
the cause.
Overall, this study suggests that cutting domestic shareholder dividend taxes is not an
effective way to stimulate investment in a small, open economy, because the marginal investor
does not pay such taxes. Perhaps surprisingly, tax changes in Canada since 2008 appear to
reflect this point. The combined dividend tax burden has been held approximately constant
but has been shifted increasingly from the corporate to the shareholder level. This kind of
reform seems to be aimed at the large set of investors (both foreign and tax exempt) for
whom entity level taxation is the primary concern.
24
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27
A
Variable Definitions
Regular dividend initiations
An initiation is defined to occur when a firm pays positive regular dividends in quarter t
and did not pay regular dividends in any of the previous four quarters. This measure is
aggregated up to the year level to indicate whether a firm initiated dividends in any quarter
of the year.
Regular dividend terminations
A termination is defined to occur when a firm paid positive regular dividends in quarter
t − 1 but does not pay regular dividends in any of the next four quarters. Further details are
necessary to code terminations at the end of a firm’s tenure in the sample since in such cases
we do not necessarily observe the proceeding four quarters. In this case, a termination is
coded as long as regular dividends are zero, with at least one more quarter of zero dividends
before the last time the firm is in the sample. Otherwise, the firm-quarter would be coded
as a dividend decrease. Again, this measure is aggregated up to the year level.
Regular dividend increases
An increase is defined to occur when regular dividends exceed the maximum nominal value
of regular dividends in the preceding four quarters by at least 20% and the firm is not
initiating dividends in the current quarter. In aggregating this measure to the year level,
multiple increases are counted as one.
Regular dividend decreases
A decrease is defined in terms of yearly total dividends to avoid mistaking a change in timing
for a decrease. For such an event to be coded, the nominal value of dividends must fall by
at least 20% in a year where a termination is not also coded.
Share repurchases
Following Grullon and Michaely [2002], share repurchases are defined as total expenditure
on the purchase of common and preferred stock (prstkc) less any reduction in value of the
net number of outstanding preferred stock (pstkrv ).
Market-book ratio
From Hoberg and Prabhala [2009], this ratio is total assets (at) less shareholder equity (se)
plus market equity (from CFMRC), all divided by total assets (at).
28
0
Billions 2010$
5
10
15
Corporate Payout in Canada: 1995−2010
1995
2000
2005
2010
Year
Regular Dividends
Share Repurchases
Special Dividends
Figure 1: The vertical line shows the beginning of the enhanced dividend tax credit reform.
This figure shows regular and special dividends, collected from CFMRC price adjustments
data. Note that though there was a notable increase in regular dividends, the timing does not
line up with the Canadian tax reform. Special dividends are usually not important relative
to regular dividends, except for a few particular quarters with individual large payments.
However, these payments generally correspond to large restructurings or divestments and so
do not appear to be tax-motivated.
29
0
Fraction of Sample
.1
.2
.3
.4
Corporate Payers in Canada: 1995−2010
1995
2000
2005
2010
Year
Any Regular
Any Repurchases
Any Special
Figure 2: The vertical line shows the beginning of the enhanced dividend tax credit reform.
The solid line shows the percentage of dividend payers in the full sample, while the dashed
line shows the same thing for the sample with all necessary controls available. There has
been a significant decrease in the fraction of dividend payers over time.
30
0
Fraction of Sample
.02
.04
.06
.08
Regular Dividend Events: 1995−2010
1995
2000
2005
2010
Year
Frac. Initiating
Frac. Decreasing
Frac. Increasing
Frac. Terminating
Figure 3: This figure shows regular dividend initiations, terminations, increases and decreases for the sample of non-financial, non-utility and non-income trust companies with all
necessary controls available. See Appendix A for definitions of these variables.
31
Dividend Events: Ineligible Shareholders as a Control Group
Increases
Fraction of Sample
.01 .02 .03 .04 .05
Fraction of Sample
0 .05 .1 .15 .2
Initiations
2002
2003
2004
2005
Year
2006
2007
2002
2003
2006
2007
2006
2007
Decreases
Fraction of Sample
0 .01 .02 .03
Fraction of Sample
0 .005 .01 .015 .02
Terminations
2004
2005
Year
2002
2003
2004
2005
Year
2006
2007
Eligible
2002
2003
2004
2005
Year
Ineligible
Figure 4: Each panel shows the time series of one type of regular dividend event, split by
whether the firm has any 10% DTC-ineligible shareholders.
32
Dividend Events: Inter−listed Firms as a Control Group
Fraction of Sample
.02 .06 .1 .14
Increases
Fraction of Sample
0 .01 .02 .03 .04
Initiations
2002
2003
2004
2005
Year
2006
2007
2002
2003
2006
2007
2006
2007
Fraction of Sample
0 .005 .01 .015 .02
Decreases
Fraction of Sample
0
.01 .02 .03
Terminations
2004
2005
Year
2002
2003
2004
2005
Year
2006
2007
Not Inter−listed
2002
2003
2004
2005
Year
Inter−listed
Figure 5: Each panel shows the time series of one type of regular dividend event, split by
whether the firm is inter-listed in the United States.
33
0
2010 Millions$
10
20
30
40
Regular Dividends: Treatment vs. Control
2002
2003
2004
2005
2006
2007
2006
2007
Year
Dividends (ineligible)
0
2010 Millions$
50
100
150
Dividends (eligible)
2002
2003
2004
2005
Year
Dividends (majority inter−listed)
Dividends (minority inter−listed)
Dividends (not inter−listed)
Figure 6: The top panel splits average regular dividends per firm into those without (eligible) and with a 10% shareholder who is ineligible for the dividend tax credit. The bottom
panel splits regular dividends per firm into three groups, those with a majority inter-listing,
a minority inter-listing and no inter-listing. In each panel, the bottom-most category in the
legend is the ‘treatment’ group, which theoretically should have increased the most after the
2006 reform.
34
Table 1: Summary statistics for the full sample with all available controls, N=6965. The
mean income/assets value in the first row would be positive and equal to .028 weighted by
total assets. The last four rows in the tables denote the probabilities of undertaking the
particular dividend event.
Income/Assets
Income
Log Assets
Asset Growth Rate
Market Cap./Assets
Market Capitalization
Market-Book Ratio
Cash/Assets
Cash
Industry Trust Inceptions
Initiation
Increase
Termination
Decrease
35
Mean (Std. Dev.)
-0.084
(0.324)
39.8
(180)
5.26
(1.93)
0.209
(0.672)
1.39
(1.70)
901
(2620)
2.17
(1.98)
0.156
(0.207)
76.9
(210)
1.43
(2.08)
0.021
(0.143)
0.054
(0.227)
0.017
(0.13)
0.013
(0.112)
Table 2: This table displays coefficients from linear probability models of regular dividend events (and repurchases, in the last column) on a post-reform dummy and accounting
controls. Each column also includes a set of dummy variables for first digit SIC. The ‘L.’
denotes the first lag of variable which it precedes. The sample comprises all non-financial,
non-utility companies, which never became income trusts, from 1995-2007. *, **, *** denote
significance at 10%, 5% and 1%, respectively.
Post-Reform Dummy
Income/Assets
L.Income/Assets
Log Assets
L.Log Assets
Asset Growth Rate
Market Cap./Assets
L.Market Cap./Assets
Market-Book Ratio
L.Market-Book Ratio
Cash/Assets
L.Cash/Assets
Industry Trust Inceptions
L.Industry Trust Inceptions
Year
N
Initiation
-0.015***
(0.006)
0.022***
(0.004)
0.015***
(0.003)
-0.001
(0.005)
0.003
(0.005)
-0.001
(0.004)
0.000
(0.003)
-0.001
(0.004)
0.002
(0.002)
-0.000
(0.003)
0.015
(0.011)
-0.008
(0.010)
-0.001
(0.001)
0.000
(0.001)
0.002*
(0.001)
6,965
Increase
0.011
(0.010)
0.025***
(0.006)
0.016***
(0.005)
0.002
(0.010)
0.021**
(0.010)
0.011
(0.007)
0.002
(0.005)
0.009
(0.007)
0.005
(0.004)
-0.010*
(0.006)
-0.009
(0.015)
-0.001
(0.015)
0.002
(0.002)
0.002
(0.002)
-0.000
(0.001)
6,965
36
Termination
0.001
(0.005)
0.003
(0.008)
0.006
(0.005)
-0.022*
(0.012)
0.024*
(0.012)
0.012*
(0.007)
-0.009**
(0.003)
0.003
(0.004)
0.006*
(0.003)
-0.002
(0.003)
-0.017*
(0.010)
0.008
(0.010)
-0.001
(0.001)
0.000
(0.001)
-0.001
(0.001)
6,965
Decrease
0.004
(0.004)
0.010***
(0.004)
-0.002
(0.003)
-0.010*
(0.006)
0.015**
(0.006)
0.005
(0.003)
-0.004*
(0.002)
0.003
(0.003)
0.003
(0.002)
-0.002
(0.002)
0.003
(0.008)
0.004
(0.007)
-0.000
(0.001)
-0.001
(0.001)
-0.001*
(0.001)
6,965
Any Repurchase
-0.008
(0.016)
0.142***
(0.018)
0.096***
(0.016)
-0.048**
(0.024)
0.074***
(0.024)
-0.004
(0.015)
-0.032**
(0.013)
0.032*
(0.017)
0.021*
(0.011)
-0.027**
(0.014)
0.066*
(0.035)
0.041
(0.034)
-0.011***
(0.002)
-0.015***
(0.003)
0.006**
(0.002)
6,965
Table 3: This table displays coefficients from linear probability models of regular dividend
events (and repurchases, in the last column) on a post-reform dummy and accounting controls. Each column also includes a set of dummy variables for first digit SIC. The ‘L.’ denotes
the first lag of variable which it precedes. The sample is comprised of all non-financial, nonutility companies, which never became income trusts, and are in the top 587 firms by market
capitalization in the particular year from 2002-2007. *, **, *** denote significance at 10%,
5% and 1%, respectively.
Post-Reform Dummy
Income/Assets
L.Income/Assets
Log Assets
L.Log Assets
Asset Growth Rate
Market Cap./Assets
L.Market Cap./Assets
Market-Book Ratio
L.Market-Book Ratio
Cash/Assets
L.Cash/Assets
Industry Trust Inceptions
L.Industry Trust Inceptions
Year
N
Initiation
-0.019*
(0.010)
0.023***
(0.007)
0.018***
(0.005)
-0.003
(0.008)
0.005
(0.008)
0.001
(0.006)
0.006
(0.007)
-0.002
(0.007)
-0.002
(0.005)
0.000
(0.006)
0.011
(0.015)
-0.012
(0.013)
-0.000
(0.001)
0.001
(0.002)
0.002
(0.003)
3,522
Increase
-0.026
(0.016)
0.026***
(0.010)
0.012
(0.007)
-0.010
(0.015)
0.040***
(0.015)
0.024*
(0.012)
0.016
(0.011)
0.012
(0.011)
-0.003
(0.009)
-0.012
(0.009)
-0.022
(0.019)
-0.015
(0.017)
0.002
(0.002)
-0.002
(0.003)
0.012***
(0.004)
3,522
37
Termination
-0.008
(0.007)
0.010
(0.007)
0.006**
(0.003)
-0.024
(0.019)
0.025
(0.019)
0.013
(0.010)
-0.011**
(0.005)
-0.004
(0.006)
0.008**
(0.004)
0.004
(0.005)
-0.018*
(0.011)
0.013
(0.010)
0.001
(0.001)
0.001
(0.001)
0.003
(0.002)
3,522
Decrease
0.005
(0.005)
0.004
(0.004)
0.003
(0.003)
0.001
(0.005)
0.003
(0.005)
0.001
(0.003)
-0.008*
(0.005)
-0.004
(0.004)
0.007*
(0.004)
0.002
(0.004)
0.015
(0.012)
0.004
(0.009)
-0.000
(0.001)
-0.001
(0.001)
-0.002
(0.002)
3,522
Any Repurchase
0.001
(0.024)
0.093***
(0.027)
0.100***
(0.025)
-0.023
(0.032)
0.055*
(0.032)
-0.014
(0.018)
-0.012
(0.023)
0.051**
(0.023)
0.008
(0.020)
-0.045**
(0.020)
0.028
(0.041)
0.037
(0.041)
-0.005
(0.003)
-0.009**
(0.004)
0.004
(0.008)
3,522
Table 4: This table displays means (with standard deviations in parentheses) for the sample
of 345 firms from 2002-2007, split by whether or not they have an ineligible shareholder and
whether or not they are inter-listed. Initation, increase, termination and decrease refer to
regular dividend events; dividend payer is the fraction of firm-years in the group which paid
any regular dividends.
Income/Assets
Log Assets
Asset Growth Rate
Market Cap./Assets
Market-Book Ratio
Cash/Assets
Initiation
Increase
Termination
Decrease
Dividend Payer
N
Eligible
-0.075
(0.309)
5.65
(2.14)
0.310
(0.813)
2.017
(2.07)
2.686
(2.31)
0.192
(0.217)
0.028
(0.166)
0.104
(0.305)
0.010
(0.102)
0.009
(0.097)
0.307
(0.462)
954
Ineligible Not Inter-listed Inter-listed
-0.022
-0.045
-0.052
(0.217)
(0.272)
(0.243)
5.58
5.30
6.48
(1.75)
(1.76)
(2.16)
0.251
0.274
0.290
(0.687)
(0.757)
(0.726)
1.57
1.67
2.07
(1.63)
(1.83)
(1.91)
2.18
2.29
2.76
(1.76)
(2.03)
(2.07)
0.171
0.176
0.193
(0.203)
(0.203)
(0.228)
0.027
0.031
0.017
(0.162)
(0.175)
(0.128)
0.060
0.074
0.097
(0.238)
(0.262)
(0.297)
0.010
0.010
0.009
(0.099)
(0.102)
(0.096)
0.006
0.007
0.011
(0.079)
(0.081)
(0.105)
0.279
0.292
0.290
(0.449)
(0.455)
(0.454)
1,116
1,526
544
38
Table 5: Each linear probability model also includes the set of accounting controls and
dummy variables for first digit SIC. The estimation sample covers 2002-2007 and includes
345 firms per year, of which 46% are in the DTC eligible group and 26% are not inter-listed.
*, **, *** denote significance at 10%, 5% and 1%, respectively.
Initiation Increase Termination Decrease
0.029*
0.025
-0.015**
0.000
(0.015)
(0.025)
(0.008)
(0.008)
Post X Not Inter-listed
-0.008
-0.030
0.005
-0.001
(0.015)
(0.030)
(0.007)
(0.010)
DTC Eligible
-0.002
0.033**
0.009
0.004
(0.009)
(0.013)
(0.006)
(0.004)
Not Inter-listed
0.019**
0.033**
-0.001
0.001
(0.010)
(0.015)
(0.007)
(0.006)
Post-Reform Dummy
-0.016
-0.008
-0.008
-0.000
(0.017)
(0.033)
(0.012)
(0.011)
N
2,070
2,070
2,070
2,070
Post X DTC Eligible
39
Table 6: Each regression includes company fixed effects. The first column uses the full
sample, while the second and fourth columns use the short sample of 587 firms from 20022007. The third column starts with the short sample and drops all firms which were in
the top 10% of the sample by total assets in 2002 to demonstrate that the increase around
the reform was limited to the largest companies. The dependent variable in the first three
columns is regular dividends, and in the fourth is share repurchases. The ‘L.’ denotes the
first lag of variable which it precedes. *, **, *** denote significance at 10%, 5% and 1%,
respectively.
Dividends
4.863***
(1.400)
Income
0.012*
(0.007)
L.Income
0.041***
(0.008)
Log Assets
-2.888***
(0.809)
L.Log Assets
0.760
(0.942)
Asset Growth Rate
1.261**
(0.561)
Market Capitalization
0.000
(0.001)
L.Market Capitalization
0.007***
(0.002)
Market-Book Ratio
-0.064
(0.189)
L.Market-Book Ratio
-0.652***
(0.167)
Cash
0.020
(0.018)
L.Cash
-0.009
(0.012)
Industry Trust Inceptions
-0.433*
(0.255)
L.Industry Trust Inceptions
-0.170
(0.246)
Year
0.160
(0.221)
N
6,965
Post-Reform Dummy
40
Dividends
3.943**
(1.530)
-0.008
(0.015)
0.042***
(0.016)
-5.082**
(2.018)
-1.105
(1.536)
1.704*
(0.914)
-0.001
(0.002)
0.009***
(0.002)
-0.490*
(0.287)
-1.016***
(0.281)
0.049
(0.036)
0.005
(0.015)
-0.574*
(0.295)
-0.363
(0.347)
0.684
(0.538)
3,522
Dividends Repurchases
0.413
2.469
(0.457)
(7.357)
0.011
0.029
(0.008)
(0.043)
0.013**
0.008
(0.007)
(0.045)
-1.003**
1.161
(0.392)
(10.301)
0.504
-15.053
(0.546)
(10.557)
0.608*
-7.073
(0.334)
(8.869)
0.001
-0.008
(0.001)
(0.012)
-0.001
0.021
(0.002)
(0.013)
-0.245**
-0.350
(0.096)
(1.190)
-0.246
-0.492
(0.154)
(1.233)
-0.001
-0.017
(0.007)
(0.055)
0.023
0.066
(0.019)
(0.106)
-0.055
-0.085
(0.072)
(1.282)
0.010
-1.164
(0.086)
(1.041)
0.328**
5.937***
(0.132)
(2.103)
3,213
3,522
Table 7: Each regression includes company fixed effects. The sample in each case consists
of 345 firms in each year from 2002-2007. The dependent variable in the first two columns
is regular dividends and in the third is share repurchases. *, **, *** denote significance at
10%, 5% and 1%, respectively.
Regular Dividends
Post X DTC Eligible
9.524
(6.458)
-5.177
Post X Not Inter-listed
(5.399)
Post X Not Majority Inter-listed
Post-Reform Dummy
N
-0.542
(2.601)
2,070
41
Regular Dividends
2.836
(4.619)
-31.835**
(14.365)
33.537***
(12.211)
-0.161
(2.554)
2,070
Repurchases
8.223
(14.347)
-156.250***
(45.902)
137.651***
(45.382)
9.293
(9.757)
2,070