TAXES AND COMPANY DIVIDENDS - A MICROECONOMETRIC INVESTIGATION EXPLOITING CROSS-SECTION VARIATION IN TAXES

We used panel data for I,2I8 UK industrial and commercial companies be tween I970 and I990 to investigate whether dividends are affected by t axes. Cross-section variation in the tax cost of paying dividends resu lts from surplus advance corporation tax (ACT) affecting some firms du ring this period. Observations on firms moving into and out of surplus ACT allow us to identify the effect of taxes whilst controlling for u nobserved firm-specific influences. Our results suggest that the tax c ost has a statistically significant and quantitatively important influ ence on dividends.