Crossborder dividend taxation and the preferences of taxable and nontaxable investors: Evidence from Canada

Abstract

We consider how fund managers respond to the conflicting preferences of their investors. We focus on the conflict between the taxable and retirement accounts of international funds, which face different tradeoffs between dividends and capital gains. In principle, managers could resolve this conflict through dividend arbitrage, but a proprietary database of dividend-arbitrage transactions shows that in practice they cannot. Thus, managers must resolve it through their investment policies. We find robust evidence that managers with more retirement money favor the preferences of retirement investors and further evidence for this view in the difference between U.S. and Canadian funds' portfolio weights. We consider how fund managers respond to the conflicting preferences of their investors. We focus on the conflict between the taxable and retirement accounts of international funds, which face different tradeoffs between dividends and capital gains. In principle, managers could resolve this conflict through dividend arbitrage, but a proprietary database of dividend-arbitrage transactions shows that in practice they cannot. Thus, managers must resolve it through their investment policies, and we find robust evidence that managers with more retirement money favor the preferences of retirement investors. We find more evidence for this view in the difference between U.S. and Canadian funds' portfolio weights. JEL classification: G11; G23; H20; F30 Correspondence to David K. Musto, Finance

Does political economy reduce agency costs? Some evidence from dividend policies around the world

“…While there has been much research on dividend policies in the United States (Eije and Megginson (2006); DeAngelo et al (2004); Weston and Siu (2003); Fama and French (2001)), relatively little is known about dividend policies outside the U.S. Apart from three papers that examine how British tax policies affect dividend policies of U.K. firms (Ang et al (1991); Lasfer (1997); Bell and Jenkinson (2002)), there are other country-specific studies that have focused on the tax effects in Australian (Cannavan et al (2004)), Taiwanese (Lee et al (2004)) and Canadian (Christoffersen et al (2005)) firms. Studies on the cross-sectional patterns of global dividend payouts are even scarcer.…”

Dividend Taxes and International Portfolio Choice

“…Hubbard, 1993). However, integration has often been implemented using mechanisms, such as imputation credits, that create a tax advantage to holding domestic rather than foreign equities, and so potentially exacerbate the home bias in asset holdings (Fuest and Huber, 2001 Christoffersen et al (2005) and Callaghan and Barry (2003) and the study of the role of withholding taxes in Chan, Covrig and Ng (2005). This paper is most closely related to the analysis by Bond, Devereux and Klemm (2007a, b) For all other securities, the "Treaty Test" establishes that a corporation resident in a country with which the United States has a tax treaty meeting certain criteria qualifies for the lower dividend tax rate.…”

Short-Sellers and Short Covering

“…Strategies exist to benefit from these arrangements. Christoffersen et al (2002Christoffersen et al ( , 2005 demonstrate increases in securities lending around dividend record dates. Because of these practices, the dataset can become obfuscated.…”