Payout Policy and Tax Deferral



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    • University of Michigan. Special thanks are due L. DeAngelo, J. Long, and R. Stulz for particularly valuable discussions. Helpful comments were also received from A. Auerbach, W. Bailey, J. Brickley, L. Dann, L. Harris, M. Jensen, J. Karpoff, H. Kim, M. Miller, P. O'Brien, J. Poterba, G. Rao, A. Ravid, E. Rice, J. Ritter, A. Shleifer, J. Thomas, R. Walkling, J. Warner, M. Weisbach, J. F. Weston, J. Zimmerman, two anonymous referees, and from finance workshop participants at Michigan, Ohio State, USC, and Wisconsin. Thanks are also due R. Masulis for comments on this paper and because our earlier joint work has materially influenced my thoughts here. Financial support was provided by the J. Ira Harris Center for the Study of Corporate Finance (University of Michigan) and the Managerial Economics Research Center (University of Rochester).


Equilibrium in the standard finance model implies that value-maximizing firms make taxable equity payouts, even when deferral effectively allows complete tax escape. Since tax deferral and consumption deferral are inherently jointly supplied goods, an excess aggregate supply of future consumption would result if firms followed conventional wisdom and adopted low or zero payout policies to capture tax deferral benefits. The market provides incentives for firms to supply both taxable payouts and capital gains by overriding any tax deferral advantage, just as it provides incentives for equity financing by overriding the corporate tax advantage of debt in “Debt and Taxes.”