The Cash Flow Sensitivity of Cash Dividends in Different Dividend Taxation Systems

46 Pages Posted: 12 Dec 2017

See all articles by Michael O'Connor Keefe

Michael O'Connor Keefe

Victoria University of Wellington

Ratheshan Manickaratnam

Victoria University of Wellington

Date Written: November 21, 2017

Abstract

This paper investigates the cash flow sensitivity of cash dividends in different cash dividend taxation systems. Using a cross-country study, we find that a firm's dividend policy in a single dividend taxation system (relative to a double dividend taxation system) is more sensitive to cash flow as measured by the propensity to initiate a cash dividend, propensity to pay a cash dividend, and in the size of the cash dividend. The cash flow sensitivity of cash dividends is asymmetric -- firms in single taxation systems more aggressively adjust dividend policy when confronted with negative rather than positive cash flows. Our findings are qualitatively identical before and after the 2003 dividend tax cut in the United States.

Keywords: Dividends, Imputation, Cash Flow

JEL Classification: G35

Suggested Citation

O'Connor Keefe, Michael and Manickaratnam, Ratheshan, The Cash Flow Sensitivity of Cash Dividends in Different Dividend Taxation Systems (November 21, 2017). Available at SSRN: https://ssrn.com/abstract=3078260 or http://dx.doi.org/10.2139/ssrn.3078260

Michael O'Connor Keefe (Contact Author)

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

Ratheshan Manickaratnam

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

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