Payout Taxation and Corporate Investment: The Agency Channel
67 Pages Posted: 6 Sep 2016 Last revised: 31 Jan 2018
Date Written: January 31, 2018
This paper demonstrates a new agency channel through which payout taxation affects corporate investment. Lower payout taxes increase managers' cash flow right to the firm via managerial ownership, which further aligns shareholder-manager incentives but exacerbates managerial risk exposures to the firm. I develop a framework to test this channel and provide supporting evidence using a setting of innovation investments around the 2003 Dividend Tax Cut. Aligning incentives stimulates the innovation input and output. Aggravated managerial risk aversion impedes innovation quantity and also shifts innovation to safer and more incremental directions. I also explore underlying operational channels and interactive mechanisms.
Keywords: Corporate Payout, Dividend Taxes, Corporate Investment, Innovation, Agency
JEL Classification: G30, G31, H25, O32
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