The Effect of the May 2003 Dividend Tax Cut on Corporate Dividend Policy: Empirical and Survey Evidence

We analyze the impact of the May 2003 dividend tax cut on corporate dividend policy. First, we find that while there was a temporary increase in dividend initiations, this increase was not long-lasting. While dividend payments were increased right after the tax change, there was a larger and more pronounced increase in repurchases during the same time period. Second, we survey 328 financial executives to determine the effects of the May 2003 dividend tax cut. We find that the tax cut led to initiations and dividend increases at some firms. However, executives say that among the factors that affect dividend policy, the tax rate reduction is less important than the stability of future cash flows, cash holdings, and the historic level of dividends. Tax effects have roughly the same importance as attracting institutional investors and the availability of profitable investments. We also find that press releases only occasionally mention the dividend tax cut as the reason for an initiation. Overall we conclude that the dividend tax reduction had only a second-order impact of payout policy.