Dividend policy behavior is at the core of finance theories and is still the most debatable and prominent issue in the corporate finance literature for both developed and developing markets. Numerous researchers have devised theories and studies to uncover the issues pertinent to dividend policy dynamics, but Black (1976) refers to the dividend as a puzzle. Brealey and Myers (2005) argue that the dividend is among the top ten unresolved problems of finance. Lintner (1956) proposes the dividend partial adjustment model and suggests that current year profits and previous year dividends are the only two contributing factors for a firm’s dividend. Later, many researchers introduced their works to suggest the key factors that drive a firm’s dividend policy. A plethora of literature identifies debt financing, earning measures, free cash flows, firm growth, investment opportunities, firm size, large shareholders, firm risk level, etc., as potential contributors for determining a firm’s dividend policy for both developed and developing markets (Bhattacharya, 1979; Ho, 2003; Kale and Noe, 1990; Charitou, 2000; Al-Malkawi, 2007; Anil and Kapoor, 2008; Juma’h and Pacheco, 2008; Ahmed and Javid, 2009; Ramli, 2010; Mehrani et al., 2011; Al-Shabibi and Ramesh, 2011; Hashemi and Zadeh, 2012; Appannan and Sim, 2011). In addition to these factors, researchers have also identified board size, board composition, board independence, board gender, ownership concentration, outside directors, audit type, CEO power, institutional ownership, investor protection and shareholder rights as the key determinants of dividend policy under the umbrella of corporate governance (Adjaoud and Ben‐Amar, 2010; Abor and Fiador, 2013; Setia-Atmaja, 2010; Erol and Tirtiroglu, 2011; Al-Shabibi and Ramesh, 2011; La Porta et al., 2000). The literature on dividend policy is too extensive to survey here, but Baker et al. (2011) argue that divided policy still vexes financial economists. Despite the ample literature published on the dividend behavior of firms, there is still room to understand what factors drive the dividend pay-out decision. This study focuses on a new dimension, i.e., financial expertise on the board, to explain the dividend policy dynamics in emerging markets. This study is motivated by the following two reasons: first, the confidence of shareholders has been shaken by various accounting scandals and financial crises since the 1990s, such as Enron, HealthSouth, Tyco, WorldCom and the financial crisis of 2007-2008, which has stressed the regulators and market makers to the need for board members to have financial expertise. Kirkpatrick (2009) and Walker (2009) argue that the lack of financial expertise on corporate boards played a major role during the financial crisis. Therefore, the presence of more financial expertise on a board ultimately influences the board’s decisions, including dividend policy. Having financial expertise on the board will keep them from being accused of failure in their watchdog role and will better serve the shareholders’ interests. Second, there is a growing body of literature on how financial expertise on boards improves the board’s efficiency (Karamanou and Vafeas, 2005; Agrawal and Chadha, 2005; Krishnan, 2005; Beasley, 1996; Dechow et al., 1996; Anderson et al., 2004), leads to better corporate practices (Krishnan, 2005; Robinson et al., 2012) and improves firm performance (Dionne and Triki, 2005; Francis et al., 2012; Fernandes and Fich, 2013). Therefore, given the significance of financial expertise of board members, there is a need to analyze how the financial expertise on a board affects the dividend policy, which is considered an important factor in mitigating agency conflict and improving corporate governance.

1- Introduction

2- Theory and hypothesis development

3- Research design

4- Results

5- Conclusion

References

Abstract

The objective of this paper is to evaluate whether dividend imputation, whereby tax credits may be passed on to shareholders for corporate tax paid, impacts corporate tax avoidance. This is undertaken with a pooled cross-sectional research design evaluating differences in tax avoidance across firms where there are significant differences in corporate tax avoidance incentives. Specifically, potential differences arise between firms paying dividends with tax credits, paying dividends without tax credits, and not paying dividends. Results suggest that firms paying dividends with tax credits attached are less likely to engage in tax avoidance with an average cash effective tax rate up to 16.9 percentage points higher than firms that pay dividends without tax credits, and up to 14.7 percentage points higher than firms that do not pay dividends at all. Accordingly, this provides insights into the effectiveness of dividend imputation in mitigating corporate tax avoidance, as well as providing support for the continuance of dividend imputation in Australia. Additionally, a positive association is found to exist between outside directors and corporate tax avoidance, extending to firms paying dividends with tax credits where dividend imputation is expected to mitigate such a relation. In combination, these results suggest heterogeneity of costs and benefits of tax avoidance and this is a challenge in evaluating corporate tax aggressiveness generally, and the impact of corporate governance on corporate tax avoidance in particular.

Introduction

The literature suggests that dividend imputation may be associated with lower levels of tax avoidance. However, there are numerous limitations in these studies. Amiran, Bauer and Frank (2016) rely on a cross country design, and both Wilkinson, Cahan and Jones (2001) and Ikin and Tran (2013) use limited samples which are unlikely to be representative of the overall population. Further, all three papers lack a theoretical foundation linking tax avoidance and dividend imputation, and provide no evidence of economic significance. Amiran et al. (2016) in particular, and with little justification, implicitly assume that under dividend imputation, managers in all firms will not engage in tax avoidance, as it is ineffective in increasing shareholders‘ wealth (Lasfer, 1996; Amiran et al., 2016). As a consequence, they ignore differences from the impact of dividend imputation across firms, and in particular, firms not paying dividends, as the effects of tax-induced dividend clienteles and the constraints on the impact of imputation are not considered. The objective of this paper is to evaluate corporate tax avoidance separately across firms paying dividends with tax credits, dividends without tax credits, and not paying dividends, where significant differences in the impact of dividend imputation on the incentives for corporate tax avoidance exist. 1 Additionally, this study evaluates the tax avoidance strategies available in an imputation setting that are in the best interests of shareholders, by controlling for outside director monitoring.

1- Hypothesis development

2- Methodology and variable construction

3- Data

4- Empirical results

5- Robustness tests

6- Conclusions

References

Abstract

This study documents the fact that large dividend increases are followed by a significant increase in leverage, consistent with management increasing the dividend to use up excess debt capacity. However, the leverage increase is not captured by a standard partial adjustment model of leverage. Nor does it reflect variables known to be related to dividend increases, such as firm maturity, investment, and risk. Instead, the dividend increase signals a complex change in the way firms adjust to their leverage target, but it does not signal a change in the target

Hypothesis development

Firms that make large dividend increases do so voluntarily. Models of dividend signaling suggest that this should be a signal of quality, implying increased future profits (Bhattacharya 1979; Miller and Rock 1985). However, the work of GMS fails to find the hypothesized increase in profits. Instead, they find a change in firm maturity and related variables. But a large part of firm maturity is predictable and so need not be signaled. The behavior they find which cannot be predicted before the dividend change includes declining reinvestment, so the dividend increase could be a signal of an unanticipated change in investment policy. Since investment policy and financing policy are closely linked through the pecking order view of financing, we hypothesize that the unanticipated change being signaled by a large dividend increase could include a change in financing policy. Specifically, we hypothesize that large dividend increases or dividend initiations signal a change in leverage policy of a type that could not be forecasted based on standard models of leverage. To be consistent with the move towards a more mature type of firm that is related to dividend increases, we hypothesize that the change is an increase in leverage. We require that the change is not related to predictable firm maturity variables, so that the dividend increase is a genuine signal: Hypothesis 1A: Firms making large dividend increases subsequently increase leverage in a way not predicted by standard models and not related to predictable firm maturity variables. The null hypothesis against which we test is that any change in leverage policy subsequent to a large dividend increase either is explained by standard models of leverage (trade-off, partial adjustment, or standard pecking order) or reflects the predictable maturing of the firm.

One of the main and more complex corporate financial decisions deals with the definition of the firm’s dividend policy, that is, the trade-off between distributing funds to shareholders and retaining the profits within the company. Marginal corporate and individual tax rates are one of the main factors that corporations ponder in such decision. Among emerging markets, Brazil is known as a country where such marginal tax rates are high, which suggests that companies pursue active tax planning strategies, which include changes in their dividend policies in response to changes in the tax legislation. This paper tests the influence of the tax preference theory on public Brazilian companies and is motivated, fundamentally, by the many changes in the tax legislation that Brazil has been through in this period, which makes for a good laboratory to study this problem. Another relevant aspect of this paper is the legal framework of corporate law in Brazil, which allows a firm to issue up to two-thirds of its total equity in nonvoting preferred shares. Therefore, to hold complete sway over a public corporation in Brazil, the controlling shareholders may have as little as 16.7 per cent of firm’s total equity. Such disproportional power raises obvious agency problems between majority and minority shareholders. Such legislation was originally established in 1976 by Act 6404/1076. It has been changed in 2001 by Act 10303/2001, which limited the maximum proportion of nonvoting shares to one-half. However, the new legislation preserved the status of existing companies. Thus, the new requirement applies only to firms, who were either created or went public after 2001, preserving the statutory privileges of existing ones. To investigate such problem, we collect data on 672 firms listed in the São Paulo Stock Exchange (Bovespa) between 1986 and 2011, making up a total of 30,134 observations. We identify the pertinent changes of the tax legislation and check the effect of such exogenous changes on corporate dividend policies of preferred and common shares of listed firms. The paper proceeds as follows: Section 2 presents a brief history of taxation law applied to dividend payments in Brazil. Section 3 summarizes previous empirical literature on this subject in Brazil. Section 4 presents the research method and describes the sample. Section 5 presents the results of our analysis. Section 6 concludes the paper.

Changes in future excess stock returns affect many fundamental areas of finance, from portfolio theory to capital budgeting (e.g., Spiegel, 2008; Cochrane, 2011). Theoretically, the latent factors that drive the systematic variation of stock returns are not directly observable; therefore, researchers have proposed many predictors as proxies for these unobservable latent factors. Examples include valuation ratios, such as the dividend yield (Campbell and Viceira, 2002; Campbell and Yogo, 2006), the dividend payout ratio (Campbell and Shiller, 1988, 1998; Lamont, 1998), and book-to-market ratio (Kothari and Shanken, 1997; Pontiff and Schall, 1998), as well as nominal interest rates (Fama and Schwert, 1977; Ang and Bekaert, 2007), the inflation rate (Nelson, 1976; Campbell and Vuolteenaho, 2004), term spreads (Campbell, 1987; Fama and French, 1988), and stock market volatility (Guo, 2006). Welch and Goyal (2008), however, show that most of the economic predictors from the literature fail to generate consistently superior out-of-sample forecasts of the U.S. equity premium, and they attribute the weak predictability to their structural instability. Consequently, recent studies have devoted more attention to the application of technical indicators, a widely used strategy by market traders and investors for modern quantitative portfolio management and investment issues (e.g., Chincarini and Kim, 2006). Technical analysis, going back at least as early as Cowles (1933), uses past prices, trading volume, and other past available data to identify price trends believed to persist into the future.1 Brock, Lakonishok, and LeBaron (1992) and Lo, Mamaysky, and Wang (2000) find strong evidence of return predictability when using technical analysis, primarily based on a moving average strategy. Similarly, Neely et al. (2014) report that technical indicators and the popular macroeconomic variables from Welch and Goyal (2008) capture different types of information that is relevant for predicting aggregate market returns. Goh et al. (2013) also show that technical analysis can generate better performance in forecasting bond risk premiums than macroeconomic predictors. However, the predictability of technical indicators for aggregate stock market returns remains an open question. Indeed, Neely et al. (2014) show that only three of the Campbell and Thompson’s (2008) 2 ROS statistics for the 14 technical indicators are significantly greater than the historical average at the 5% level. Further, the forecasting power of the first principal component (PC) extracted from the technical indicators in out-of-sample periods is quite weak; the mean squared forecast error (MSFE) for the PC is marginally significantly less than the historical average MSFE at the 10% level according to the MSFE-adjusted statistics. Since out-of-sample forecasts are of great interest to practitioners for portfolio allocation and risk management, it is important to provide a method that can improve these forecasts substantially.

How firms limit their free cash flow (FCF) in the face of low investment opportunities is one of the most important research topics in financial economics. This is the case because low investment opportunities can distort the efficient allocation of internal funds and destroy firm value. When firms have limited investment opportunities, cash holdings are largely at risk of being diverted by managers in projects that benefit them personally, thereby damaging the interests of shareholders (Easterbrook, 1984; Jensen, 1986; Dittmar et al., 2003). The FCF hypothesis of agency theory suggests that excess cash reserves increase managerial discretion and provides managers with the incentive to pursue their own interests. The problem stems from self-serving managers who divert cash flow to benefit themselves at the expense of shareholders. Myers and Rajan (1998) suggest that managers tend to retain more private benefits from liquid assets, and Byrd (2010) argues that FCF is available to managers for discretionary purpose. Opler et al. (1999) highlight managers’ preference for the control that comes with holding high levels of cash reserves. Apart from using FCF to invest in projects with negative net present value (NPV), Kadioglu and Yilmaz (2017) suggest that managers tend to make unnecessary expenditures that benefit themselves at the expense of shareholders’ interests. According to Labhane and Mahakud (2016), the excess amount of FCF in the hands of managers increases the agency cost, as they are free to use these financial reserves for their own interests. To avoid any wasteful expenditure, shareholders of such firms monitor the activities of managers. These monitoring activities increase the firm cost of monitoring and hence increase the agency cost. One of the ways to reduce the FCF problem is to pay out more of these substantial cash flows as dividends (Fairchild, 2010). Agency theory suggests that outside shareholders prefer dividends to retained earnings because insiders might squander cash retained within the firm (Easterbrook, 1984; Jensen, 1986; Myers, 2000). Distributing cash to shareholders reduces the chance that the managers may use the available resources inappropriately (Jensen, 1986; Lang and Litzenberger, 1989). Kadioglu and Yilmaz (2017) argue that dividends help check managers and create a discipline mechanism without the direct intervention of shareholders. In parallel, studies in finance suggest that payouts lower retained earnings and hence increase the need of managers to go to financial markets to raise funds, where monitoring is offered at lower costs. (Easterbrook, 1984; Jensen, 1986; La Porta et al., 2000; DeAngelo et al., 2006; Denis and Osobov, 2008; Guizani, 2014). To the extent that external financial markets play a monitoring role, they presumably reduce managers’ incentives to engage in wasteful consumptions.

بررسی رابطه بین دو بخش مهم انتظارات سرمایه گذار در رابطه با سیاست سود های سهام نقدی و ثروت سهامداران در این مطالعه مورد بررسی قرار می گیرد . هنوز تعدادی از تلاش های تحقیقاتی برای یافتن این رابطه دقیق انجام می گیرند . این بررسی بر داده ای تکیه می کند که از شصت و هشت شرکت بورس سهام کراچی جمع آوری می گردد . سال مالی برای بعضی شرکت ها در ماه دسامبر پایان می یابد در حالی که شرکت های دیگر ماه ژوئن را برای اتمام سال مالی بر می گزینند . تحلیل به دو دسته تقسیم می گردد : 37 شرکت در یک دسته قرار می گیرند که حساب هایشان را در ماه ژوئن می بندند و از دوره 2003 تا 2007 را مد نظر قرار دادند نظر به این که 31 شرکت در دسته دوم قرار می گیرند که حساب های خودشان را در ماه دسامبر می بندند . دوره بررسی برای دسته دوم از سال 2004 تا 2007 بود . مدل حداقل مربعات معمولی و تاثیر ثابت مورد استفاده قرار می گیرند تا معادله رگرسیون را از طریق پذیرفتن برگشتی های سهام تخمین بزنند که به همانند متغیر و نسبت مدت برگشت سرمایه سود سهام به صورت متغیر توضیحی تشریح گردیدند . نتایج تحلیل نشان می دهند که برگشتی های سرمایه با سیاست سود سهام و اندازه شرکت همبستگی منفی دارند و با برگشتی های سرمایه در دارایی ها ، نسبت درامد به قیمت و رشد شرکت برای شرکت های با انتهای سال مالی ماه ژوئن همبستگی مثبت دارند . برگشتی های سرمایه برای شرکت های با انتهای سال مالی دسامبر با اندازه شرکت ، نسبت پرداخت های سود سهام و برگشتی های دارایی ها همبستگی منفی دارند . تحلیل آشکار می سازد که مدل OLS یک مدل خوب برای تخمین برگشتی های سرمایه نمی باشد اما مدل تاثیرات ثابت یک مدل خوب می باشد که می توان برای اهداف تخمینی استفاده نمود .

با بررسی تاثیرگذاری سه نوع مالکیت دولتی بر تصمیم گیری های مربوط به پرداخت سود سهام شرکت ها برای اولین بار، این مطالعه بر روی تفاوت های موجود در رفتار پرداخت سود سهام در میان صاحبان یا مالکان دولتی نهایی مختلف متمرکز می باشد. مشخص گردیده است که تشکیلات دولتی تحت نظارت سازمان های دولتی با سطح پایین تر، و هم چنین آن هایی که به دولت های محلی وابسته هستند، نسبت به شرکت هایی که توسط مالکان نهایی خصوصی کنترل می شوند، به احتمال زیاد اقدام به پرداخت سود سهام بیشتری می نمایند. تشکیلات مرکزی به عنوان مالکان نهایی به احتمال زیاد به پرداخت سود سهام بیشتر نسبت به شرکت هایی گه توسط مالکان نهایی خصوصی کنترل می شوند، راغب نیستند. الگوهای مشابهی در مورد تاثیرگذاری حقوق نقدی و حق رای مالکان نهایی بر تصمیم گیری های مربوط به پرداخت سود سهام مشخص شده اند. تا حد معینی، تشکیلات مرکزی رفتار مشابه تری با شرکت های خصوصی نسبت به انواع دیگری از شرکت های تحت کنترل دولت دارند. هیچ گونه مصادره یا سلب مالکیتی در کلیه انواع شرکت های تحت کنترل دولت به عنوان سهامداران کنترل کننده نهایی از طریق هرم های شرکتی شناسایی شده اند، اگر چه شواهد ضعیفی برای شرکت های متعلق به سرمایه گذاران خصوصی مشخص شده اند. هم چنین این نکته نیز استنباط می شود که پرداخت سود سهام دیگر شرط لازم برای گرفتن مجوز صدور سهام محسوب نمی گردد.