Dividends and Profits: Some Unsubtle Foreign Influences



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    • John F. Kennedy School of Government, Harvard University. I am grateful to Kristen Willard for outstanding research assistance, to her and to Alan Auerbach, Anne Case, Kathryn Dominguez, Mitchell Peterson, James Poterba, René Stulz (the editor), Lawrence Summers, and an anonymous referee for helpful comments on an earlier draft, and to Princeton University's John M. Olin Program for the Study of Economic Organization and Public Policy for financial support.


American corporations earn a significant share of their profits from foreign sources, out of which they appear to pay dividends at rates that are three times higher than their payout rates from domestic profits. Why firms do so is unclear, although this behavior is consistent with the use of dividends to signal profitability. This payout behavior implies that a significant part of the U.S. tax revenue generated by the foreign profits of U.S. corporations arises through the taxation of dividends received by individuals, and that the cost of capital may be higher for foreign than for domestic operations.