Dividend taxes and stock volatility

Abstract

How do dividend taxes affect stock volatility? In this paper, I use a decrease in dividend taxes as a natural experiment to identify their impact on firm's price volatility. If a risk-averse executive faces price risk through his incentive contract, changes in stock volatility due to dividend taxes may increase agency costs and therefore decrease overall welfare. Stock volatility decreased after the tax cut for firms where an executive has large holdings of shares and options relative to firms where an executive has small holdings of shares and options. Therefore, with a risk-averse executive and risk-neutral shareholders, dividend taxes may exacerbate agency costs. The increase in agency costs will decrease shareholder welfare, which can be partially offset by the use of options in the employment contract.

Kebijakan Pengecualian Pajak Dividen: Kabar Baik Atau Buruk Bagi Investor

“…Penelitian eksperimen di Swiss yang dilakukan oleh Isakov, Pérignon, & Weisskopf (2021) menunjukkan bukti bahwa kebijakan penghapusan pajak deviden dapat meningkatkan nilai investasi kembali pada perusahaan. Penelitian Ferris (2018) juga menunjukkan bukti bahwa kebijakan pemotongan pajak deviden dapat mempengaruhi volatilitas saham perusahaan di bursa.…”

Impact of Market Risk on Credit Risk of Subsequent Period in Manufacturing Sector of Pakistan

“…The asymmetry of information is further decreased knowing own credit risks. Ferris (2018) stressed that stock volatility and incentive of executive are adversely related to each other. When an executive pay is associated with stock prices, an executive with lucrative pay will try to reduce variation in stock prices because it will affect his take home salary.…”