Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut





    Search for more papers by this author
    • Jeffrey R. Brown and Scott Weisbenner are at the University of Illinois at Urbana-Champaign and NBER, and Nellie Liang is at the Federal Reserve Board. The views expressed in this paper are those of the authors and not necessarily those of the Federal Reserve Board. We thank Darrell Ashton, Vivek Choudhary, Yoon Sok Lee, and Lizy Mathai for excellent research assistance. We thank John Graham, Paul Harrison, Kevin Hassett, and seminar participants at the University of Illinois, the Federal Reserve Board, the American Enterprise Institute, and the 2006 American Finance Association Meetings for their comments and constructive suggestions.


We test whether executive stock ownership affects firm payouts using the 2003 dividend tax cut to identify an exogenous change in the after-tax value of dividends. We find that executives with higher ownership were more likely to increase dividends after the tax cut in 2003, whereas no relation is found in periods when the dividend tax rate was higher. Relative to previous years, firms that initiated dividends in 2003 were more likely to reduce repurchases. The stock price reaction to the tax cut suggests that the substitution of dividends for repurchases may have been anticipated, consistent with agency conflicts.