Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
  • Browse All
    Payout Taxes and the Allocation of Investment
    18 Nov 2010Working Paper Summaries

    Payout Taxes and the Allocation of Investment

    by Bo Becker, Marcus Jacob and Martin Jacob
    The corporate payout that shareholders periodically receive--dividends or repurchases of shares--is subject to taxation in many countries. Such taxes make it cheaper to finance investment out of retained earnings than from equity issues. Using tax data from 25 countries over a 19-year period, this paper discusses whether these taxes have a direct effect on investor behavior, and to what extent. Research was conducted by Bo Becker of Harvard Business School, Marcus Jacob of the European Business School, and Martin Jacob of the Otto Beisheim School of Management. Key concepts include:
    • Capital expenditures are higher in firms with easy access to inside equity.
    • High taxes tend to lock capital into companies that generate internal cash flows, ahead of companies that need to raise outside equity. Tax rates do affect investment decisions.
    • Firms with low ownership by corporate insiders are less affected by tax changes than firms with high insider ownership. This may reflect the fact that insiders with high stakes have incentives aligned with other shareholders.
    LinkedIn
    Email

    Author Abstract

    When corporate payout is taxed, internal equity (retained earnings) is cheaper than external equity (share issues). High taxes will favor firms that can finance internally. If there are no perfect substitutes for equity finance, payout taxes may thus change the investment behavior of firms. Using an international panel with many changes in payout taxes, we show that this prediction holds well. Payout taxes have a large impact on the dynamics of corporate investment and growth. Investment is "locked in" in profitable firms when payout is heavily taxed. Thus, apart from any aggregate effects, payout taxes change the allocation of capital.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: October, 2010 (Revised September 2011)
    • HBS Working Paper Number: 11-040
    • Faculty Unit(s): Finance
      Trending
        • 31 May 2023
        • HBS Case

        From Prison Cell to Nike’s C-Suite: The Journey of Larry Miller

        • 25 Jan 2022
        • Research & Ideas

        More Proof That Money Can Buy Happiness (or a Life with Less Stress)

        • 16 May 2023
        • HBS Case

        How KKR Got More by Giving Ownership to the Factory Floor: ‘My Kids Are Going to College!’

        • 01 Jun 2023
        • HBS Case

        A Nike Executive Hid His Criminal Past to Turn His Life Around. What If He Didn't Have To?

        • 25 Feb 2019
        • Research & Ideas

        How Gender Stereotypes Kill a Woman’s Self-Confidence

    Find Related Articles
    • Finance

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Accessibility
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College