NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Dividends and Profits: Some Unsubtle Foreign Influences

James R. Hines Jr.

NBER Working Paper No. 3730 (Also Reprint No. r2068)
Issued in June 1991
NBER Program(s):   PE

American corporations earn a large and growing share of their profits from their foreign operations. This paper evaluates the effect of foreign earnings on dividend payments by American corporations. The results suggest that the effect may be rather dramatic: that, all other things equal, U.S. corporations pay dividends out of foreign earnings at rates that are three times higher than their payout rates from domestic earnings. Why firms do so is unclear, though this behavior may be consistent with a signaling view of dividends. There is a curious tax consequence of this high payout rate on foreign earnings: the tax system, which grants foreign tax credits to U.S. corporations for the foreign taxes they pay, may receive more revenue from taxing the dividends of U.S. shareholders than from the corporate tax on foreign earnings.

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Document Object Identifier (DOI): 10.3386/w3730

Published: Journal of Finance, vol. LI, no. 2, pp. 661-689, June 1996. citation courtesy of

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