Investor protection, taxation, and dividends

The Determinants of Share Repurchases in Europe

“…This is consistent with Brounen et al (2004) who find that managers are less shareholder-oriented, and it is in line with Alzahrani and Lasfer (2012), who find that the impact of tax consideration on payouts is relatively weak as opposed to strong investor countries, such as the UK.…”

“…Moreover, we find that in the UK, contrary to Germany and France, repurchasing firms pay high dividends and cater to higher tax shareholder clienteles, consistent with Alzahrani and Lasfer (2012). In sum, share repurchasing firms are more widely held, suggesting that share buybacks can serve as a self-imposed discipline mechanism for management and reduce the respective agency costs.…”

“…This is consistent with Lie and Lie (1999), who find that, conditional on the proportion owned by institutional investors, managers are more sensitive to their shareholders' tax implications. Alzahrani and Lasfer (2012) find in countries with strong investor protection that investors prefer to receive fewer dividends when the cost of tax is high rather than reducing the agency costs via dividend payouts. In contrast, in lower investor protection countries, taxation has a minimal impact on payout policies.…”

“…Similarly, Chay and Suh (2009) find that mature firms with low cash flow uncertainty are more likely to pay dividends supporting the life-cycle theory of dividends (De Angelo et al, 2006;Denis and Osobov, 2008). We do not take the substitutability of dividends by repurchases as de facto since the interrelationship of dividends and repurchases is affected by tax, corporate, and institutional factors (Alzahrani and Lasfer, 2012) and since the decision to announce a dividend payment will be based on a number of additional factors such as firms' long-term performance, growth and earnings sustainability (Skinner, 2008), the life-cycle of dividends (Denis and Osobov, 2008), and their inherent 'stickiness'.…”

“…As in Agrawal (2012), who finds that stringent regulations empower investors to exert more pressure on management for paying cash dividends, we address the question of whether payout policies are affected by regulatory and institutional frameworks by performing a cross-country analysis distinguished by a wide diversity in terms of institutional, regulatory, and tax settings (Alzahrani and Lasfer, 2012;La Porta et al, 2000;v.Eije and Megginson, 2008), corporate governance frameworks, shareholder protection, managerial attitudes towards shareholder wealth maximisation, firm growth, and sustainability (La Porta et al, 1997, 1999, 2000Brounen et al, 2004;Morck et al, 2005 Furthermore, we find it is only in the UK that the excess cash flow is positively related to the likelihood of announcing a share repurchase. We find evidence that the differences in country characteristics are important in making buyback announcements.…”