TY  - JOUR
AU  - Bernheim,B. Douglas
TI  - Tax Policy and the Dividend Puzzle
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3434
PY  - 1990
Y2  - September 1990
UR  - http://www.nber.org/papers/w3434
L1  - http://www.nber.org/papers/w3434.pdf
N1  - Author contact info:
B. Douglas Bernheim
Department of Economics
Stanford University
Stanford, CA 94305-6072
Tel: 650/725-8732
Fax: 650/725-5702
E-Mail: bernheim@stanford.edu
AB  - This paper offers a new explanation of the dividend puzzle, based upon a model in which firms attempt to signal profitability by distrubuting cash to shareholders. I assume that dividends and repurchases are identical, except that dividends are taxed more heavily. Nevertheless, I demonstrate that, under certain plausible conditions, corporations will pay dividends. Indeed, some firms will actually pay dividends, and then retrieve a portion of these payments by issuing new equity (perhaps through a dividend reinvestment plan), despite the fact that this appears to create gratuitous tax liabilities. In addition to providing an explanation for the dividend puzzle, I also derive a number of strong results concerning corporate payout decisions and government tax policy. Some of these results are surprising. For example, the relationship between repurchases and firm quality is hump-shaped. Moreover, despite the fact that a higher dividend tax rate depresses dividend payments, it does not affect either government revenue or welfare. 
ER  -