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Corporate Investment and Dividend Decisions under Differential Personal Taxation

Published online by Cambridge University Press:  06 April 2009

Ronald W. Masulis  and
Brett Trueman
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Abstract

This paper explores implications of differential personal taxation for corporate investment and dividend decisions. The personal tax advantage of dividend deferral causes shareholders to generally prefer greater investment in real assets under internal as opposed to external financing. Furthermore, dividend deferral is shown to be costly at the corporate level, causing shareholders in different tax brackets at times to disagree over optimal investment and dividend policies under internal financing. The profitability of internally-financed security investment is shown to depend on a security's tax status and shareholders' tax brackets. However, externally-financed security purchases are unprofitable from a tax standpoint.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 23 , Issue 4 , December 1988 , pp. 369 - 385
Copyright
Copyright © School of Business Administration, University of Washington 1988

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