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Effects of Bush Tax Cut and Obama Tax Increase on corporate payout policy and stock returns

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Abstract

This article analyzes the effects of the American Taxpayer Relief Act of 2012 (Obama Tax Increase) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (Bush Tax Cut) on corporate payout decision and stock returns. Logit and fixed-effect panel data analyses are conducted on all firms listed in NYSE, Amex and NASDAQ in the announcement windows of two, three and four quarters before and after the tax reforms. The results show that the implementation of these tax reforms more persistently affects dividend payments than stock repurchases. It also has a boosting effect on stock returns in the Bush Tax Cut that is 75 % greater than their reducing effect in the Obama Tax Increase, in absolute terms, controlling for dividend payment and stocks repurchase. These effects are robust to different market capitalization sizes. Less solvent firms persistently spend larger dollar amounts in stock repurchases, especially in the announcement of the Bush Tax Cut (+1.11 % per solvency ratio percentage in the [−2Q, +2Q] window). Insolvency is more often significant and with positive impacts on stock returns in the Obama Tax Increase, suggesting that some investors decide to migrate to leveraged-high-growth firms once they realize that some dividend-paying firms could change their dividend policies.

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Notes

  1. Chahyadi and Salas (2012) assert that 100% of the decline in the proportion of dividend payers can be explained by changes in firm characteristics only.

  2. See Hausman (1978).

  3. For example, a firm with good investment opportunities (high Tobin’s Q) could decide to start paying dividends after a dividend tax cut, but the payment dollar amounts from those high-Tobin’s-Q firms will not necessarily be higher than other firms’ amounts.

  4. On section 5, a robustness check from Table 9 compares the variables for dividend payers and non-payers in the periods from 1990 to 1999 and from 2000 to 2014.

  5. The top-income stockholders are the majority of investors. As noted by Huang and Marr (2012), the top 20% of taxpayers received around 94% percent of all capital gains in 2012.

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  1. College of Business and Entrepreneurship, University of Texas Rio Grande Valley, Edinburg, TX, USA

    Andre C Vianna

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Correspondence to Andre C Vianna.

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Andre C Vianna is a Financial analyst from the Ministry of Finance of Brazil under a doctoral research grant at The University of Texas Rio Grande Valley provided by CAPES-Brazil.

The opinions in this publication are the author’s responsibility, not necessarily expressing the viewpoint of the Ministry of Finance of Brazil.

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Vianna, A. Effects of Bush Tax Cut and Obama Tax Increase on corporate payout policy and stock returns. J Econ Finan 41, 441–462 (2017). https://doi.org/10.1007/s12197-016-9362-x

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  • DOI: https://doi.org/10.1007/s12197-016-9362-x

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