The Impact of Corporate Taxation on Firms' Payout Choices
This paper illustrates how corporate tax considerations shape firms’ payout policies. Advance corporation tax (ACT) increased the tax cost to UK firms of distributing cash to shareholders. We demonstrate how the tax cost arising from ACT payments affected the channels through which UK firms returned capital to shareholders. In particular, we document and describe two exotic payout methods that enabled firms to avoid paying ACT. Firms choosing these methods are associated with significantly greater ACT problems than a control sample of firms that opted for conventional self-tender offers and special dividends. Event study tests indicate that the decision to adopt tax efficient payout methods created significant additional value for shareholders beyond the basic cash distribution decision.