Taxes, payout policy, and share price

The Korean government temporarily lowered dividends tax rates for investors of firms that significantly increased dividends payments in 2015–2017. We examine how the dividends tax cut affects corporate payout policies and share price, using the difference in differences analysis augmented with instrumental variable approaches and propensity score matching. We find that firms with large insider ownership and large income actively took advantage of the tax cut and that the qualifying firms increased dividends payments. Share price of firms taking advantage of the tax cut is estimated to increase by 20%, consistent with the agency cost and signaling of dividends. Our finding of share price increases of the qualifying firms is robust to the propensity score matched sample, smaller samples without chaebol, and placebo effect tests.