The Relation Between Firm Divi

THE RELATION BETWEEN FIRM DIVIDEND POLICY AND THE
PREDICTABILITY OF CASH EFFECTIVE TAX RATES
by
Matthew James Erickson
__________________________
Copyright © Matthew James Erickson 2017
A Dissertation Submitted to the Faculty of the
DEPARTMENT OF ACCOUNTING
In Partial Fulfillment of the Requirements
For the Degree of
DOCTOR OF PHILOSOPHY
In the Graduate College
THE UNIVERSITY OF ARIZONA
2017

ProQuest Number: 10275635

All rights reserved

INFORMATION TO ALL USERS
The quality of this reproduction is dependent upon the quality of the copy submitted.

In the unlikely event that the author did not send a complete manuscript
and there are missing pages, these will be noted. Also, if material had to be removed,
a note will indicate the deletion.

ProQuest 10275635

Published by ProQuest LLC (2017 ). Copyright of the Dissertation is held by the Author.

All rights reserved.
This work is protected against unauthorized copying under Title 17, United States Code
Microform Edition © ProQuest LLC.

ProQuest LLC.
789 East Eisenhower Parkway
P.O. Box 1346
Ann Arbor, MI 48106 - 1346
THE UNIVERSITY OF ARIZONA
GRADUATE COLLEGE
As members of the Dissertation Committee, we certify that we have read the dissertation
prepared by Matthew James Erickson, titled “The Relation between Firm Dividend
Policy and the Predictability of Cash Effective Tax Rates”, and recommend that it be
accepted as fulfilling the dissertation requirement for the Degree of Doctor of
Philosophy.
_______________________________________________________________________ Date: April 11, 2017

Katharine Drake
_______________________________________________________________________ Date: April 11, 2017

Sandy Klasa
_______________________________________________________________________ Date: April 11, 2017

Jeff Yu
Final approval and acceptance of this dissertation is contingent upon the candidate’s
submission of the final copies of the dissertation to the Graduate College.
I hereby certify that I have read this dissertation prepared under my direction and
recommend that it be accepted as fulfilling the dissertation requirement.
________________________________________________ Date: April 11, 2017

Dissertation Director and Chair: Katharine Drake
2
STATEMENT BY AUTHOR
This dissertation has been submitted in partial fulfillment of the requirements for
an advanced degree at the University of Arizona and is deposited in the University
Library to be made available to borrowers under rules of the Library.
Brief quotations from this dissertation are allowable without special permission,
provided that an accurate acknowledgement of the source is made. Requests for
permission for extended quotation from or reproduction of this manuscript in whole or in
part may be granted by the copyright holder.
SIGNED: MATTHEW JAMES ERICKSON
3
ACKNOWLEDGEMENTS
I am deeply grateful to my dissertation committee members, Dan Dhaliwal
(deceased), Katharine Drake (chair), Sandy Klasa, and Jeff Yu, for their encouragement,
support, and guidance. Additionally, this project has greatly benefitted from workshop
participants at The University of Arizona, Virginia Polytechnic Institute and State
University, the University of Georgia, The George Washington University, and The Ohio
State University. I also appreciate helpful comments from Nathan Goldman, Shyam
Sunder, Erin Towery, and the Arizona Tax Reading Group. Finally, I am thankful for
funding from the University of Arizona’s Eller College of Management, the American
Institute of Certified Public Accountants and specifically contributors to the Accounting
Doctoral Scholars program, and the Charles Koch Foundation for their dissertation grant
initiative. All errors are my own.
4
DEDICATION
This dissertation would not exist without the loving support and guidance of many
individuals. You have given freely and often and no words can express my appreciation
for your sacrifice. Specifically, I dedicate this dissertation as follows:
To my former teachers, for encouraging and nurturing curiosity.
To my brothers, for letting me explore the world with you.
To my parents, for sacrificing of themselves to help smooth the path for me, for
guiding and encouraging me, and for loving me in more ways than I can possibly list.
To my wife, for being willing to join with me on this great journey, for trusting
me, and for never doubting me.
To my children, for your love and for reminding me that you are the future and
that the future is bright.
To God, without whom nothing would be possible and with whom everything is
possible.
Thank You and I Love You All!
5
TABLE OF CONTENTS
List of Figures and Tables .................................................................................................7

Abstract ...............................................................................................................................8
I. Introduction ............................................................................................................9
II. Literature Review ................................................................................................14
Relevance and Valuation of Dividends......................................................14
Dividend Policy and Strategic Firm Decisions ..........................................17
III. Hypotheses ............................................................................................................19
IV. Research Design ...................................................................................................23
Empirical Design .......................................................................................23
Sample Selection and Characteristics ........................................................29
V. Results ...................................................................................................................30
VI. Additional Analyses .............................................................................................36
Tests Addressing Endogeneity...................................................................36
Tax Strategies Used by Dividend-Paying Firms ........................................40
Relative Importance of Dividend Payments ..............................................42
Dividend Payments and the Level of a Firm’s Cash ETR .........................43
Alternate Specifications .............................................................................44
VII. Conclusion ............................................................................................................45
Appendix ...........................................................................................................................46
Figures and Tables (See List) ..........................................................................................48
References .........................................................................................................................65
6
LIST OF FIGURES AND TABLES
Figure 1 .............................................................................................................................48
Panel A: Average VOL_CETR Before and After Initiating a Dividend ........................48
Panel B: Average VOL_CETR Before and After Eliminating a Dividend ....................48
Table 1: Sample Selection ...............................................................................................49
Table 2: Descriptive Statistics .........................................................................................50
Table 3: Correlation Matrix ...........................................................................................51
Table 4: The Effect of Dividends on Volatility of Cash ETRs .....................................52
Table 5 ...............................................................................................................................53
Panel A: The Effect of Dividends on Volatility of Cash ETRs Pre- and Post- Dividend
Initiation .........................................................................................................................53
Panel B: The Effect of Dividends on Volatility of Cash ETRs Pre- and Post- Dividend
Elimination .....................................................................................................................54
Panel C: The Effect of Volatility of Cash ETRs on the Likelihood of Dividend
Initiations and Eliminations ...........................................................................................55
Table 6: Influence of Financial Constraint on Relation between Dividends and
Volatility of Cash ETRs ...................................................................................................57
Table 7: Alternate Econometric Specifications: Effect of Dividends on Volatility of
Cash ETRs ........................................................................................................................59
Table 8: Alternate Samples: Effect of Dividends on Volatility of Cash ETRs ...........61
Table 9: Effect of Dividends on Firm Tax Strategies ...................................................63
7
ABSTRACT
I examine the relation between a firm’s dividend policy and its strategic tax decisions. I
posit that the capital market pressure associated with paying a dividend leads dividend-
paying firms to seek predictable cash flows. I specifically focus on the volatility of a
firm’s cash effective tax rate (ETR) due to the observability, large size, variability, and
periodicity of cash tax payments. Consistent with dividend payments altering a firm’s
strategic tax preferences, I find that firms that pay a higher dividend exhibit more
predictable cash ETRs. Further, I find that the predictability of a dividend-initiating
(eliminating) firm’s cash ETR subsequently increases (decreases). Additionally, I find
that, consistent with prior research suggesting that financially constrained firms “borrow”
cash from their tax account, financial constraint moderates the positive relation between
the predictability of a firm’s cash ETR and its dividend payments. Importantly, my
results hold for firms initiating a dividend in response to the exogenous shock of the Bush
tax cuts. Finally, I also examine specific tax strategies dividend-paying firms use to help
increase the predictability of their cash tax payments. My results contribute to the
academic literature by examining whether, and how, dividend-paying firms alter their
strategic tax decisions. Additionally, I contribute to ongoing public policy debates over
the value of dividend payments by demonstrating a positive relation between dividend
payments and the predictability of a firm’s cash tax payments.
JEL Codes: G35; H25; M40; M41; M48
8
I. INTRODUCTION
In this study, I examine the relation between a firm’s need for predictable cash
flow and its strategic tax decisions. Specifically, I contend that dividend-paying firms
make a strong commitment to periodically return cash to equity investors and therefore
require predictable cash flows. While firms paying a regular dividend may implement
many different strategies to help support their dividend stream, I specifically focus on
dividend-paying firms’ cash tax strategies due to the observability, large size, extensive
variation, and periodicity of cash tax payments. I argue that, because dividend-paying
firms value predictable cash flows, they attempt to increase the predictability of their cash
tax payments. I test this relation across a broad sample of firms, in more narrow settings
around dividend initiations and eliminations, and in a cross-sectional analysis of
financially constrained firms. Additionally, I validate my findings using a variety of
alternate econometric techniques, examining a subsample of firms initiating a dividend
payment in response to the exogenous shock of the Bush tax cuts,1 and by exploring
specific tax strategies that dividend-paying firms use to achieve more predictable cash tax
payments. My findings are important to academics since they demonstrate a specific
outcome of paying a dividend as well as identify a reason why some firms might
prioritize predictable cash tax payments as a strategic objective. Likewise, I also
contribute to public policy given the recent trend in legislating firms’ ability to pay
dividends.
1
The term Bush tax cuts typically refers to both the Economic Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). However,
the provisions of EGTRRA are not relevant to my study. Accordingly, my tests focus only on the passage
of JGTRRA.
9
A long line of prior literature supports the idea that dividends are important to
investors and that managers take steps to ensure that dividend payments, once initiated,
remain stable or steadily increase (e.g., Lintner 1956). Indeed, “some executives tell
stories of selling assets, laying off a large number of employees, borrowing heavily, or
bypassing positive NPV projects, before slaying the sacred cow of cutting dividends”
(Brav, Graham, Harvey, and Michaely 2005, p. 500). Likewise, Michaely, Thaler, and
Womack (1995, p. 573) express this idea by noting that, “when a firm initiates the
payment of a cash dividend, or omits such a payment, the firm is making an extremely
visible and qualitative change in corporate policy”.
While I expect that dividend policy affects a variety of firm behaviors, I focus on
firms’ cash tax strategies for several reasons.2 First, cash taxes paid represent a large,
variable expense and account for 27.0 (25.6) percent of a mean (median) firm’s pre-tax
income with an interquartile range of 25.2 percentage points (Dyreng, Hanlon, and
Maydew 2008). Second, similar to dividends, taxes must be paid in cash at regular,
predictable intervals (quarterly) and accordingly represent a recurring cash outlay that
managers may attempt to stabilize. This predictable periodicity is not present in many
other major firm expenses such as capital expenditures as these tend to be “lumpy” rather
than “smooth” (Caballero and Engel 1999). Finally, while prior research documents that
firms manage the level of their GAAP ETRs (Dhaliwal, Gleason, and Mills 2004; Krull
2004), more recent research examines the sustainability of tax expense as an important
2
I focus on the volatility of cash, not GAAP, tax expense since dividends are typically paid in cash and
thus cash tax expense is more relevant to my study. In untabulated analysis, I find that my results are
generally robust (but weaker) when examining the volatility of a firm’s GAAP tax expense.
10
strategic tax goal for some firms (McGuire, Neuman, and Omer 2013; Neuman 2016).3
Because firms manage their GAAP tax expense in certain circumstances and
sustainability is an important goal for some firms, I expect that dividend-paying firms
also attempt to manage the predictability of their cash tax expense.
While the findings in prior research support the notion that dividend-paying firms
should exhibit more predictable cash ETRs, it is possible that my evidence will not
support this contention or that I will find evidence in favor of an opposite result.
Specifically, to the extent that dividend-paying firms have easy access to additional cash
(e.g., via the public debt market; (Alli, Khan, and Ramirez 1993; Aivazian, Booth, and
Cleary 2006)), they may not attempt to increase the predictability of their cash tax
payments and may instead focus on minimizing cash tax payments. If this occurs, I may
fail to find (or find a positive relation) between a firm’s dividend payments and the
volatility of its cash ETR.
Despite this tension, I find consistent evidence supporting the expectation that
dividend-paying firms exhibit more predictable cash tax payments. Using a sample of
57,578 observations from 1987 to 2015, I test the association between a firm’s dividend
policy and the predictability of its cash ETR. My results demonstrate a negative relation
between the amount of regular, recurring dividends paid by a firm and the volatility of the
firm’s cash ETR. This relation is also economically significant. My primary test implies
that, for my mean firm, a doubling of its dividend payout is associated with an 11.1%
3
These studies discuss the importance of a firm’s tax strategy in general but do not examine whether
dividend payments influence the firm’s tax strategy. My results help explain why certain firms focus on
sustainable tax payments.
11
decrease in the volatility of its cash ETR. For comparison, a doubling of my mean firm’s
cash flow volatility is associated with a 17.9% increase in the volatility of its cash ETR.
Further, I find consistent evidence that firms initiating (eliminating) a dividend
payment experience a subsequent decrease (increase) in the volatility of their cash ETRs;
these results help address endogeneity concerns inherent in the broad, pooled setting of
my first specification. Moreover, my tests demonstrate that firm-level financial constraint
moderates the relation between a firm’s dividend payments and the volatility of its cash
ETR, consistent with the notion that financially constrained dividend-paying firms
prioritize obtaining immediate cash. While I specifically focus on dividend-paying firms,
this result builds on prior research demonstrating a general relation between financial
constraint and strategic changes in tax behavior (Akamah, Omer, and Shu 2016;
Edwards, Schwab, and Shevlin 2016).
In additional analysis, I find that my results are robust to a variety of alternate
specifications designed to help address endogeneity concerns with respect to both
correlated, omitted variables and reverse causality. Specifically, I re-estimate my primary
analysis using a matched sample design, including firm-fixed effects, and employing an
instrumental variables specification. Additionally, I also use the 2003 Bush tax cuts as an
exogenous shock to firms’ incentives to pay dividends since prior research demonstrates
that firms did not anticipate this tax cut and it also increased the likelihood that a firm
initiated a dividend payment (Chetty and Saez 2005, 2006; Dhaliwal, Krull, and Li 2007).
Moreover, I also employ counterfactual analysis based on both special dividends and
share repurchases since I expect that, unlike regular dividends, special dividends and
share repurchases return capital to shareholders without imposing an expectation of
12
consistent future dividends or repurchases and thus do not generate a need for predictable
future cash flows.
Finally, I explore several strategies dividend-paying firms may use to help them
achieve predictable cash ETRs. A firm may use many different types of tax planning
strategies ranging from those that produce completely certain tax benefits (e.g., excluding
municipal bond interest) to those that may produce highly variable tax benefits (e.g.,
employing tax strategies with a lack of definitive guidance) (Hanlon and Heitzman 2010).
I expect that dividend-paying firms are less likely to engage in less predictable tax
strategies as such strategies may be overturned upon audit and induce volatility in future
cash tax payments. I find that, while firms that pay more in dividends have higher total
book-tax differences, they are less likely to engage in “extreme” forms of tax planning as
evidenced by lower discretionary book-tax differences (Frank, Lynch, and Rego 2009)
and a lower likelihood of engaging in tax shelters (Wilson 2009).
My results contribute to the academic literature in several ways. In general, prior
research focuses on why firms pay dividends; I examine a specific outcome of paying a
dividend and thus demonstrate a previously overlooked consequence of dividend
payments.4 Additionally, my results identify a strategic reason why firms might prefer
predictable cash tax payments even at the potential cost of increasing total tax payments.
This contributes to ongoing discussion over whether and why some firms prefer a
sustainable tax strategy (Weisbach 2002; Neuman 2016).
4
Bradley, Capozza, and Seguin (1998) represents an important exception; their study finds that dividend-
paying firms exhibit less cash flow volatility. In the next section, I discuss their results in more detail and
argue that my results are distinct from their study across several important dimensions.
13
Additionally, I contribute to the public policy debate by identifying a hidden
impact of policies that alter firms’ incentives to pay dividends. To the extent that policies
such as the Bush tax cuts incentivize firms to pay more dividends, my results imply that
these policies also lead to firms preferring a less volatile tax rate. Conversely, policies
such as the American Jobs Creation Act, the Troubled Asset Relief Program (TARP), and
the Dodd-Frank Wall Street Reform and Consumer Protection Act limit or prohibit
certain firms from paying dividends.5 My results suggest that an indirect consequence of
these acts may be that lower or non-existent dividend payments reduce incentives for
managers to maintain less volatile cash tax payments.6
The remainder of my study proceeds as follows: in Section II, I provide
background information on the dividend literature with a specific focus on studies
discussing the importance of dividend payments. In Section III, I develop and formally
state my hypotheses. Section IV contains a summary of my research design. In Section V,
I provide a summary of my primary results. In Section VI, I discuss the results of
additional analyses. Finally, in Section VII, I offer some concluding thoughts.
II. LITERATURE REVIEW
Relevance and Valuation of Dividends
In their seminal analysis of payout policy and firm value, Miller and Modigliani
(1961) observe that, in perfect capital markets, “the irrelevance of dividend policy….is
5
Dodd-Frank’s provisions target the banking and financial services sector, which I excluded from my
sample due to the unique nature of banks. However, since these provisions may subject a bank’s dividend
policy to government review, they help illustrate a recent trend toward regulation constraining dividend
payments for certain firms.
6
Further, while beyond the scope of this study, to the extent that firms trade off a lower tax rate for a more
stable one, my results suggest that policies incentivizing (restraining) dividend payments lead to less (more)
tax avoidance.
14
‘obvious once you think of it’” (p. 414).7 Early evidence supports this claim (Watts 1973;
Black and Scholes 1974; Gonedes 1978; Watts 1976) even in the presence of asymmetric
tax treatment between dividends and capital gains (Miller and Scholes 1978). However,
capital market imperfections unwind the “irrelevance view” and lead to a variety of
theoretical explanations and empirical support for a relation between dividend policy and
firm value. Importantly, in my setting, it is unnecessary to identify the specific reason
dividend payout policy matters to investors as my hypotheses only assume that managers
recognize and act as though dividend policy does matter to investors.
Investors may value dividends for several reasons. Since dividends reduce the size
of a firm by distributing cash to shareholders, they reduce agency costs by: limiting a
manager’s ability to waste idle cash on value-decreasing investments (Jensen 1986);
forcing managers to more frequently access the capital markets to fund new investments
(Myers and Majluf 1984); and improving shareholder monitoring of firm actions
(Easterbrook 1984). Additionally, dividends reduce information asymmetry between
managers and shareholders by allowing managers to credibly signal current cash flow
(Miller and Rock 1985), future cash flow (Bhattacharya 1979), and/or other valuable
private information about future investments (John and Williams 1985; Aggarwal, Cao,
and Chen 2012). Finally, the existence of taxes and tax clienteles may explain the
importance of dividend policy to investors. Since different classes of investors face
different marginal tax rates on income from dividends, firms with a high dividend yield
7
Miller and Modigliani (1961) condition their claim on the level of a firm’s investment. Given that
dividend payout ratios tend to be conservative, many dividend-paying firms need not trade off investment
for higher dividend payments. However, managers at 66.9 percent of dividend-paying firms make
investment plans after making dividend decisions (Brav et al. 2005). This indicates that, for the majority of
dividend-paying firms, dividend policy supersedes even investment considerations.
15
are less attractive to individuals with a relatively high tax rate on dividend income (e.g.,
short-term, high-income individual investors) and more attractive to individuals with a
relatively low tax rate on dividends (e.g., corporations, tax-exempt investors) (Elton and
Gruber 1970; Litzenberger and Ramaswamy 1979; Dhaliwal, Erickson, and Trezevant
1999; Baker and Wurgler 2004; Graham and Kumar 2006).
While evidence remains divided concerning why dividend policy should matter to
investors, evidence also clearly demonstrates that dividend policy does matter to
investors and that managers actively seek to maintain a predictable dividend policy. This
is important to my study because it helps explain why a firm might change its actions to
accommodate a specific dividend payout strategy. Specifically, investors react strongly to
changes in dividend policy and this reaction is asymmetric with dividend decreases
resulting in a more extreme reaction than dividend increases (Asquith and Mullins Jr
1983; Benesh, Keown, and Pinkerton 1984). On average, market reactions to dividend
increases (decreases) are approximately 3 percent (-7 percent) and continue to drift
upward (downward) (Michaely et al. 1995). Similarly, there is a positive relation between
dividend announcement returns and subsequent earnings changes; this implies that
investors rationally interpret dividend announcements as “good news” (Healy and Palepu
1988; Lipson, Maquieira, and Megginson 1998). Moreover, dividend reductions are more
likely to occur for loss firms. However, demonstrating the reluctance of managers to cut
dividends, losses are “a necessary, but not sufficient, condition for dividend reductions”
and managers strongly attempt to avoid dividend reductions or omissions even in the
presence of losses (DeAngelo, DeAngelo, and Skinner 1992, p. 1838). Collectively, these
16
studies indicate that investors expect predictability in a firm’s dividend policy and react
strongly to any deviation from their expectation.
Dividend Policy and Strategic Firm Decisions
Prior research also demonstrates that managers understand the importance
investors place on predictable dividends and seek to maintain or gradually increase
dividend payout ratios. Early work by Lintner (1956) finds that managers target a long-
term dividend payout ratio and therefore dividend payments tend to be relatively sticky.
This result persists over time; Brav et al. (2005) survey mangers of dividend-paying firms
and find that 88.1 percent of managers perceive negative consequences to reducing
dividends and 89.6 percent try to maintain a predictable dividend stream from year to
year. Empirical evidence demonstrates this as well. Allen and Michaely (2003) examine
trends in payout policy over time and observe that “during the entire 1972-1998 period,
aggregate dividends fell only twice…Firms usually increase dividends gradually and
rarely cut them” (p. 349). Demonstrating that managers are reluctant to cut dividends is
important in my setting because it provides a plausible explanation for a relation between
dividend payout policy and firm policy – managers may structure firm policy to help
minimize the risk that the firm will decrease or omit future dividend payments.
Existing evidence supports the idea that firm attributes and strategy change in
response to dividend policy. Skinner and Soltes (2011) find that earnings are more
predictable for dividend paying firms and that losses are less persistent. Likewise
Venkatesh (1989) finds that stock returns are less volatile following the initiation of
dividends; similarly, Sant and Cowan (1994) find that dividend omissions precede an
increase in earnings volatility, stock return volatility, beta, and analyst forecast
17
dispersion. Most related to my study is Bradley et al. (1998) who find a negative relation
between dividend payout policy and the volatility of a firm’s cash flows. I differ from
Bradley et al. (1998) in that I examine the predictability of a firm’s cash effective tax rate
and not the volatility of a firm’s cash flow. Additionally, Bradley et al. (1998) limit their
analysis to the REIT sector; I exclude REIT firms from my sample since these firms have
unique tax incentives that limit their generalizability. Finally, to further distinguish my
findings, I include the volatility of a firm’s cash flow as a control variable in my
regressions.
While these studies provide general evidence that specific firm characteristics
change in response to dividend policy, surveys of managers provide the most persuasive
evidence of dividend policy influencing firm actions. In Brav et al. (2005)’s survey,
managers of dividend-paying firms clearly admit that maintaining a predictable dividend
policy influences their actions. Specifically, to maintain dividends, managers are willing
to pass up positive NPV projects, raise costly external funds, sell assets, and even
terminate employees. I argue that, while it is difficult to observe these types of extreme
actions, it is relatively easy to measure the volatility of a firm’s cash ETR and that prior
literature suggests that managers manage the tax account to achieve strategic firm
objectives (Dhaliwal et al. 2004; Krull 2004; McGuire et al. 2013; Higgins, Omer, and
Phillips 2015; Neuman 2016).
In summary, prior evidence strongly supports the idea that dividend policy
matters to investors, that managers implement sustainable, predictable dividend policies,
and that managers are willing to change a firm’s tax policy to accomplish a strategic
18
objective. Next, I present specific hypotheses exploring the relation between dividend
payout policy and firm tax strategy.
III. HYPOTHESES
Based on the above discussion, I expect that the capital market pressure from
paying a dividend leads dividend-paying firms to take steps to avoid reducing or omitting
a dividend payout. In a recent Wall Street Journal article on the importance of dividends,
a Wal-Mart spokesperson expressed this sentiment by observing that “the company has ‘a
meaningful dividend that has grown for 43 consecutive years…[we] are committed to
strong returns for shareholders’” (Eisen 2016). Similarly, prior studies show that a firm
aligns its tax strategy with its business strategy (Higgins et al. 2015; Neuman 2016).
Alignment between tax and business strategy is especially important because some tax
strategies are only available for a single time period or provide non-recurring tax benefits
(Drake, Lusch, and Stekelberg 2017) and, accordingly, may not increase the
predictability of a firm’s cash tax payments on an ongoing basis. Thus, I specifically
expect that firms alter their tax strategies to increase the predictability of their cash tax
payments8 and state this relation as my first hypothesis as follows:
H1: There is a positive relation between the predictability of a firm’s cash effective tax
rate and the firm’s dividend yield.
One concern with my first hypothesis is that the relation between dividend payout
policy and tax strategy is endogenous. In particular, not all firms are equally likely to pay
8
While cash tax expense and GAAP tax expense are positively correlated, GAAP tax rules may artificially
smooth the volatility of GAAP tax expense since GAAP tax rates are influenced by reserves for potentially
unfavorable tax outcomes such as settlements with the IRS. Overall, GAAP tax rates measure tax expense
associated with current period accounting income while cash tax rates capture outlays of cash (Hanlon and
Heitzman 2010).
19
a dividend (Fama and French 2001; Denis and Osobov 2008) and firm characteristics also
influence tax strategies (Gupta and Newberry 1997; Rego 2003; Dyreng et al. 2008;
Wilson 2009). Thus, in my second hypothesis, I examine whether the predictability of a
firm’s cash tax payment changes around the initiation and/or elimination of a dividend.
I expect that, subsequent to the initiation of a dividend, dividend-paying firms
attempt to increase the predictability of their cash ETR in response to capital market
pressure. This is consistent with Michaely et al. (1995)’s view that initiating a dividend
payment represents a substantial change in corporate policy. Thus, I expect that, once a
firm begins paying a dividend, the need for predictable cash tax payments drives the firm
to select tax strategies that result in less volatile cash tax payments. I present this
contention as the first part of my second hypothesis as follows:
H2A: The predictability of a firm’s cash effective tax rate increases following the
initiation of a dividend payment.
Likewise, if the capital market pressure associated with paying a dividend leads a
dividend-initiating firm to increase the predictability of its cash ETR, then I also expect
that the removal of this pressure is associated with a subsequent decrease in the
predictability of a firm’s cash ETR following the elimination of its dividend. While a
number of factors may change after a firm ceases paying a dividend, I expect that the
relaxation of the need for predictable cash tax payments results in firms no longer
selecting tax strategies associated with less volatile cash tax payments. I present this
contention as the second part of my second hypothesis as follows:
H2B: The predictability of a firm’s cash effective tax rate decreases following the
elimination of a dividend payment.
20
Importantly, to the extent that managers only consider initiating (eliminating) a
dividend when the firm’s operations and cash flows are predictable (unpredictable), firms
with more (less) predictable cash ETRs may be more likely to initiate (eliminate) a
dividend. If this is true, changes in the predictability of a dividend initiating (eliminating)
firm’s cash ETR may occur prior to the initiation (elimination) of a dividend. If this
occurs, I may fail to find results for my second hypothesis even if firms change their
behavior in response to paying a dividend. Likewise, it is also possible that firms with
more (less) predictable cash ETRs are more likely to pay an initial dividend (eliminate
their dividend) and that (removing) the capital market pressure associated with this
decision incentivizes (de-incentivizes) these firms to further increase the predictability of
their cash ETRs subsequent to the initiation (elimination) of their dividend. If this occurs,
I may find results for my second hypothesis but “miss” the portion of a firm’s change in
behavior that occurs prior to the change in its dividend policy. While I do not develop a
formal hypothesis to address this, I discuss the design and results of tests examining this
possibility in subsequent sections to provide a more complete understanding of changes
in a firm’s behavior in response to initiating (eliminating) a dividend payment.
Finally, while my first hypothesis postulates a positive relation between the
predictability of a firm’s cash ETR and its dividend payout policy, I expect that
financially constrained dividend-paying firms may focus less on the predictability of their
cash ETRs. As previously discussed, reducing dividends incurs a steep capital market
penalty and firms go to great lengths to avoid this penalty (DeAngelo and DeAngelo
1990; DeAngelo et al. 1992; Christie 1994; Brav et al. 2005). Additionally, Leone (2008)
outlines 16 different tax strategies companies can employ to generate additional cash
21
while Law and Mills (2015) and Edwards et al. (2016) specifically show that financially
constrained firms reduce short-term tax payments in an attempt to provide immediate
cash. Importantly, Akamah et al. (2016) extends these studies and demonstrates that
financially constrained firms also exhibit more volatile cash ETRs.
While prior research (Law and Mills 2015; Akamah et al. 2016; Edwards et al.
2016) demonstrates how financial constraint influences the tax strategies of broad
samples of firms, the majority of dividend paying firms are not financially constrained
relative to non-dividend paying firms. Accordingly, I extend this logic to constrained
versus unconstrained dividend-paying firms. In contrast to my second hypothesis which
focuses on examining whether dividend initiating (eliminating) firms alter the
predictability of their cash tax payments, my third hypothesis focuses on the actions of
constrained (but not necessarily dividend-ceasing) firms. Consequently, I propose my
third hypothesis as follows:
H3: For dividend-paying firms, financial constraint moderates the positive relation
between the predictability of the firm’s cash effective tax rate and its dividend yield.
In summary, I examine the link between firm dividend policy and the
predictability of a firm’s cash ETR. I hypothesize a positive relation between dividend
payouts and the predictability of cash ETRs, investigate whether this relation changes for
dividend initiating or eliminating firms, and examine whether financial constraint
mitigates any positive relation. In the next section, I present the specific equations I use
to test these hypotheses.
22
IV. RESEARCH DESIGN
Empirical Design
To test my first hypothesis examining whether dividend-paying firms exhibit
more predictable cash ETRs, I regress the volatility of a firm’s cash effective tax rate on a
firm’s dividend payout as well as a variety of control variables from prior research
(Brown, Drake, and Wellman 2015; Guenther, Matsunaga, and Williams 2017).
Specifically, I employ the following equation:
VOL_CETRit-2,t = α + β1 DIVi,t + β2 VOL_CFit-2,t + β3 PT_ROAi,t

+ β4 VOL_PT_ROAit-2,t + β5 SIZEi,t + β6 PP&Ei,t + β7 R&Di,t + β8 LEVi,t
+ β9 MTBi,t + β10 ESO_BENi,t + β11 IND_CETRi,t + β12 CASHi,t
+ Ʃ Industry and Year Fixed Effects + εi,t (1)
All equations cluster standard errors by firm; subscripts i and t represent firm i at time t.
VOL_CETR is the three-year standard deviation from t-2 to t of the firm’s cash ETR
(total taxes paid divided by pre-tax income less any special items) and captures the
predictability of a firm’s cash tax expense. DIV is the amount of the firm’s per-share
dividends divided by its stock price. Consistent with prior research, I use Compustat to
calculate control variables but CRSP to determine dividends. Specifically, I only include
regular, periodic dividends on common stock (CRSP distribution codes of 1200-1259).9
To the extent that dividend-paying firms exhibit more predictable cash tax payments, I
expect a negative and significant coefficient on DIV across all three specifications.
9
Codes 1200-1259 represent ordinary (i.e., not as a result of a liquidation, reorganization, stock split,
etc…) cash dividends paid in U.S. dollars with a monthly, quarterly, semi-annual, annual, unknown, or
unspecified frequency. In additional analysis, I also consider the effect of special dividends (CRSP
dividend distribution codes of 1270-1299) as well as share repurchases (calculated from Compustat/CRSP
data but with no specific dividend distribution code).
23
I define VOL_CF as the three-year standard deviation from t-2 to t of the firm’s
cash flow from operations scaled by total assets and include it to control for the overall
volatility of a firm’s cash flows. I measure PT_ROA as the firm’s pre-tax net income
divided by total assets; this variable controls for the possibility that more profitable firms
may make greater investments in tax planning. I use pre-tax income to avoid any
potential mechanical correlation issues given that my variable of interest is the volatility
of a firm’s cash tax expense. VOL_PT_ROA is the three-year standard deviation from t-2
to t of the firm’s PT_ROA and serves as an additional control to capture the overall
predictability of a firm’s operations. I measure SIZE as the natural logarithm of the firm’s
total assets and note that this variable captures potential “economies of scale” with
respect to a firm’s ability to engage in tax planning activities. I define PP&E, R&D, and
LEV as the firm’s property, plant, and net equipment, research and development
spending, and total debt respectively; I scale each of these variables by total assets and
include them as they represent deductible or creditable expenses that reduce a firm’s tax
payments. MTB is the ratio of the firm’s market value of equity to its book value of
equity and captures differences between the equity market’s value of a firm and the
current accounting book value of a firm. ESO_BEN is the cash tax benefit the firm
received from the issuance of employee stock options.10 IND_CETR is the firm’s cash
ETR (cash taxes paid divided by pre-tax income less the effect of any special items)
minus the average cash ETR for other firms in the same industry and year.11 CASH is the
10
For most firms, this amount is zero; however, prior research finds that, when non-zero, it is potentially an
important determinant of cash tax expense volatility (Brown et al. 2015; Guenther et al. 2017). As this
variable is not reliably populated for my entire sample period, I also re-run my tests excluding it and find
that my inferences are unchanged.
11
Consistent with prior research, I control for a firm’s industry-adjusted cash ETR to capture the tax
planning of the firm relative to other similar firms (Guenther et al. 2017). In untabulated analysis, I find
that my inferences are unchanged if I control for a firm’s unadjusted cash ETR. As I only adjust cash ETR
24
amount of a firm’s cash and cash equivalents scaled by total assets and controls for the
liquid resources available to a firm for investment in tax planning activities. The
appendix contains a detailed description of all variables.
I test this equation on three sets of firms: all firms with available data; all firms
with available data that are not small firms, firms with extreme cash ETR, or firms with
negative pre-tax income; and only firms paying a positive dividend. In particular, by
limiting the third sample to only firms that pay a positive dividend, I partially address
concerns that any relation observed in my first two samples stems from dividend-paying
firms generally exhibiting more predictability in their operations (i.e., a life cycle effect
(Mueller 1972; Porter 1980; Anthony and Ramesh 1992; Grullon, Michaely, and
Swaminathan 2002; Dickinson 2011)).
In the first part of my second hypothesis, I test whether the volatility of a firm’s
cash ETR decreases subsequent to the initiation of a dividend. To test this relation, I
isolate a subsample of firms that begin paying a dividend during my sample period and
examine the volatility of those firms’ cash ETRs during the period immediately before
and immediately after the initiation of the dividend using the control variables from
equation (1) as follows:

+ Ʃ Industry and Year Fixed Effects + εi,t (2A)
by industry, it is still appropriate to include industry fixed effects. My inferences are unchanged if I remove
industry fixed effects.
25
For this test, I only examine firms that begin paying a dividend at some point
during my sample period; I exclude firms that either always pay a dividend or never pay a
dividend. I then examine the volatility of these firms’ cash ETRs starting three years prior
to the initiation of the dividend and ending three years after the initiation of the dividend.
Because, by definition, a firm does not pay a dividend in the pre-period, my DIV variable
does not capture any decreases in the volatility of a firm’s cash ETR in the pre-period but
instead represents the effect of initiating a dividend payment. Thus, H2A predicts a
positive relation between the predictability of the firm’s cash ETR and the amount of
dividends paid by the newly paying dividend firm. Accordingly, I expect a negative and
significant coefficient on DIV.
Likewise, for the second part of my second hypothesis, I examine whether the
predictability of a firm’s cash ETR decreases subsequent to the elimination of a dividend.
Similar to the first portion of my second hypothesis, I isolate a subsample of firms that
stop paying a dividend during my sample period and examine the volatility of those
firms’ cash ETRs during the period immediately before and immediately after the
elimination of their dividend using the control variables from equation (1) as follows:

+ Ʃ Industry and Year Fixed Effects + εi,t (2B)
Consistent with H2B, I predict that dividend-eliminating firms experience a
subsequent decrease in the predictability of their cash ETRs. Because, by definition, DIV
is equal to zero once a firm eliminates its dividend (i.e., in the post-elimination period), a
26
decrease in predictability occurs to the extent that I find a negative and significant
coefficient on DIV.
As previously discussed, I am also interested in investigating whether any change
in predictability occurs before, after, or both before and after a firm initiates (eliminates)
its dividend. I test this by examining whether firms with more (less) predictable cash
effective tax rates are more likely to initiate (eliminate) a dividend payment. Since Fama
and French (2001) identify several key factors that explain whether or not a firm begins
paying a dividend, I test this by adding these factors to the control variables included in
equation (1) and present this specification as equation (2C) which employs the following
logistic equation:
P(NEW_DIV=1)i,t [P(STOP_DIV=1)i,t]= α + β1 VOL_CETRit-2,t + β2 PT_ROAi,t

+ β3 MTBi,t + β4 MK_PCTKi,t + β5 AT_GROWTHit-1,t + β6 VOL_CFit-2,t
+ β12 ESO_BENi,t + β13 IND_CETRi,t + β14 CASHi,t
+ Ʃ Industry and Year Fixed Effects + εi,t (2C)
In this equation, P(NEW_DIV=1)i,t is an indicator variable coded as one if a firm pays a
dividend in the current year but not in either of the two prior years. Alternatively,
P(STOP_DIV=1)i,t is an indicator variable coded as one if a firm does not pay a dividend
in the current year but did in both of the two prior years. MK_PCTL represents the
percentage of all publicly traded firms that have the same or smaller market capitalization
while AT_GROWTH represents the growth in the firm’s assets from t-1 to t. All other
variables are as previously defined.
Since I am interested in the likelihood that a firm initiates (eliminates) a dividend
payment, I examine a sample of firms that do not (do) pay a dividend when they first
enter my sample. Specifically, I exclude all firms that began (did not begin) continuously
27
paying a dividend before they entered my sample period. Additionally, once a firm
begins (ceases) paying a dividend, I remove it from the sample for all subsequent years.
I test this equation on three samples of firms; all firms with available data, a
sample of dividend initiating (eliminating) and non-dividend initiating (eliminating) firms
in the same industry and year matched by size and profitability, and an entropy-balanced
sample of all firms with available data (Hainmueller and Xu 2013).12 While I do not
make a formal prediction, I note that, if the predictability of a firm’s cash ETR changes
before initiating (eliminating) a dividend payment, I should observe a negative (positive)
and significant coefficient on VOL_CETR.
Finally, my third hypothesis tests whether financially constrained dividend-paying
firms exhibit relatively less predictable cash ETRs as compared to financially
unconstrained dividend-paying firms. To test this hypothesis, I isolate a sample of
dividend-paying firms and add an interaction variable for financial constraint to equation
(1) as follows:
VOL_CETRit-2,t = α + β1 DIVi,t + β2 CONSTRAINi,t + β3 DIVi,t * CONSTRAINi,t
+ β4 VOL_CFit-2,t + β5 PT_ROAi,t + β6 VOL_PT_ROAit-2,t + β7 SIZEi,t + β8 PP&Ei,t
+ β9 R&Di,t + β10 LEVi,t + β11 MTBi,t + β12 ESO_BENi,t + β13 IND_CETRi,t
+ Ʃ Industry and Year Fixed Effects + εi,t (3)
12
Entropy balancing “can be used to create balanced samples…where the control group data can be
reweighted to match the covariate moments in the treatment group (Hainmueller and Xu 2013).”
Specifically, one concern with analyzing equation (2C) on a broad sample of firms is that the control
sample contains firms with disperse characteristics. An entropy-balanced sample addresses this concern by
re-weighting the control variables such that they are similar for dividend initiating (eliminating) and non-
dividend initiating (eliminating) firms. One advantage of entropy balancing relative to a matched sample
design is that it does not discard “non-matching” observations. In untabulated analysis, I also re-estimate
equation (1) on my primary sample using entropy balancing and find that my inferences remain unchanged.
I do not tabulate this analysis because I also run equation (1) on a sample of only firms with positive
dividend-payments which eliminates the need to control for potential differences between dividend-paying
and non-dividend-paying firms.
28
I use Z_SCORE, the firm’s Z-score following Altman (1968), to determine financial
constraint. I multiply a firm’s Z-Score by negative one so that higher values of Z_SCORE
represent relatively greater financial constraint.13 CONSTRAIN is a dummy variable set
equal to one if a dividend-paying firm’s Z_SCORE is in the top half for all dividend-
paying firms. Consistent with my first hypothesis, I expect a negative coefficient on DIV.
This implies that the predictability of a firm’s cash tax payments is increasing in its
dividend payments. Conversely, I expect a positive a significant coefficient on the
interaction of DIV * CONSTRAIN which implies that financial constraint moderates the
general increase in the predictability of cash tax payments from dividend payments.
Sample Selection and Characteristics
For my primary tests, I begin with a sample of all Compustat firms with a non-
missing primary identifier (GVKEY), positive assets, and a post SFAS 95 (post 1987)
statement of cash flows. I eliminate firms in either the utility (SIC codes 4900-4999) or
financial services (SIC codes 6000-6999) industries as these firms are heavily regulated
and have different incentives. Since I examine the three-year volatility of a firm’s cash
ETR, I also remove firm-years for firms without two consecutive previous years of data. I
also remove firm-years for firms missing information necessary to calculate variables of
interest or control variables. Further, I remove firm-years with extreme cash ETRs
(single-year cash ETRs greater than 1 or less than 0) as these firms exhibit abnormal tax
behavior.14 Additionally, I remove firm-years for small firms as defined by Fama and
13
I select this measure of financial constraint because it does not rely on whether a firm pays a dividend to
compute the degree of firm financial constraint. Other techniques such as those developed in Whited and
Wu (2006) or the KZ-index as proposed by Kaplan and Zingales (1997) and implemented in Lamont, Polk,
and Saá-Requejo (2001) use dividend payments to partially determine whether a firm is financially
constrained. In contrast, I focus on whether a dividend-paying firm is relatively constrained as compared to
other dividend-paying firms.
14
In untabulated analysis, I winsorize cash ETRs at 0 and 1 and find that my inferences are unchanged.
29
French (2001) (those with total assets of less than $500,000 or with book equity less than
$250,000) since these firms likely face a different set of tax planning opportunities
relative to larger firms. Finally, I remove firm-years for firms with a three-year
cumulative loss as loss firms exhibit different tax behavior. This results in a final sample
of 57,578 firm-year observations. I summarize my sample selection process in Table 1.
[Insert Table 1 Here]
I present descriptive statistics in Table 2; these align well with prior research.
Approximately 37% of firm-years in my sample pay a dividend and the average
VOL_CETR is 18.89%.
Similarly, in Table 3, I provide a correlation matrix for key variables of interest.
While this is a univariate analysis, I note a negative correlation between DIV and
VOL_CETR (p<0.01), indicating that dividend-paying firms exhibit less volatile cash
ETRs. Additionally, there is a positive correlation between VOL_CETR and both
VOL_CF (p<0.01) and VOL_PT_ROA (p<0.01). This further underscores the need to
control for the general volatility of the firm. Next, I turn to a formal analysis of my
hypotheses.
V. RESULTS
In Table 4, I present the result of testing my first hypothesis that there is a positive
relation between the predictability of a firm’s cash ETR and the firm’s dividend yield. I
employ three specifications examining the relation between DIV and VOL_CETR. The
first column contains the result for a sample prior to the elimination of small firms, firms
30
with extreme cash ETRs, and loss firms.15 In the second column, I provide the result with
respect to my primary sample that excludes these small, extreme cash ETR, or loss firms.
The third column contains the result for only the sample of firms that pay a positive
dividend.16 Consistent with my expectation, in all three cases I note a negative and
significant relation between dividend payments and the volatility of a firm’s cash ETR
(p<0.01 in all three specifications).17 This implies that firms paying higher dividends
exhibit more predictable cash ETRs.
Next, I examine the result of my second hypothesis exploring the change in the
predictability of a dividend-initiating (ceasing) firm’s cash ETR. Before I discuss these
results in detail, I graph the average volatility of a firm’s cash ETR from five years prior
to an event date (either the initiation or the elimination of a dividend) until five years
after the event date.18 In Panel A of Figure 1, I present the result of graphing the volatility
of my mean dividend-initiating firm’s cash ETR before and after the initiation of a
dividend. For ease of interpretation, I also include a solid line representing the volatility
of my mean dividend-initiating firm’s cash ETR at t -5, five years before the initiation of
a dividend. In four out of five years preceding the initiation of a dividend, the average
15
In general, I exclude these firms from my analyses. However, I include them in the first column of Table
4 to demonstrate the result of my first hypothesis on a broad sample of firms.
16
To further demonstrate that my results hold even when only examining dividend-paying firms, in
untabulated analysis I drop all non-dividend paying firms as well as the bottom half of dividend-paying
firms and find that my inferences are unchanged.
17
In untabulated analysis, I also employ quantile regression to test for non-linearity in this relation. I
examine my relation at the 25th, 50th, and 75th quantiles and find similar inferences as in my primary
specification. The pattern of coefficients from this analysis does not suggest non-linearity in my primary
results.
18
To provide stronger identification, my tests only use a three-year window surrounding the event date.
However, I graph a five-year window to provide better insight into any long-term patterns. My formal tests
are robust to employing a five-year window before and after an event date instead of a three-year window.
31
volatility of a dividend-initiating firm’s cash ETR is the same or higher than the volatility
at t -5. In contrast, in all five years following the initiation of a dividend, the average
volatility of a dividend-initiating firm’s cash ETR is lower than the volatility at t -5. This
indicates that, on average, the volatility of a dividend-initiating firm’s cash ETR declines
subsequent to the initiation of a dividend.
Similarly, in Panel B of Figure 1, I present the result of graphing the volatility of
my mean dividend-eliminating firm’s cash ETR before and after the cessation of a
dividend. As in Panel A, I also include a solid line representing the average volatility of
my mean dividend-eliminating firm’s cash ETR at t = -5, five years before the
elimination of a dividend. In general, the volatility of a dividend-eliminating firm’s cash
ETR remains relatively consistent prior to t = 0, the year in which the firm eliminates its
dividend payment. In contrast, in all five years following the cessation of a dividend, the
average volatility of a dividend-eliminating firm’s cash ETR is higher than in the pre-
elimination period. This indicates that, on average, the volatility of a dividend-
eliminating firm’s cash ETR increases subsequent to the elimination of a dividend. While
these graphs are not a formal test of my second hypothesis, they provide preliminary
evidence consistent with my expectations.
[Insert Figure 1 Here]
In Table 5, Panel A, I provide the result of testing the first part of my second
hypothesis that dividend-initiating firms experience more predictable cash ETRs after
initiating their dividend. To test this, I isolate only those firms that begin paying a
dividend at some point during my sample period and examine these firms for a period of
three years prior to the initiation of a dividend until three years following the initiation of
32
a dividend. I then estimate equation (2A) and examine whether dividend-paying firms
exhibit less volatile cash ETRs subsequent to the initiation of a dividend. Since I use the
period immediately before and immediately after the initiation of a dividend, any effect I
find in this test is incremental to managers’ efforts to increase the predictability of cash
tax payments prior to the initiation of a new dividend. I find results consistent with the
first part of my second hypothesis that dividend-initiating firms exhibit more predictable
cash ETRs after the initiation of a dividend (p<0.05).
Likewise, in Table 5, Panel B, I present the result of testing the second portion of
my second hypothesis. Similar to Panel A, I isolate only those firms that cease paying a
dividend at some point during my sample period and examine these firms for a period of
three years prior to the elimination of their dividend until three years after the elimination
of their dividend. I then estimate equation (2B) and examine whether dividend-
eliminating firms exhibit more volatile cash ETRs subsequent to the cessation of their
dividend payment. I find results consistent with the second part of my second hypothesis
that dividend-eliminating firms exhibit more volatile cash ETRs after the elimination of
their dividend (p<0.01).
Finally, in Table 5, Panel C, I provide the results of examining whether dividend
initiating (eliminating) firms alter their tax behavior prior to the initiation (elimination) of
their dividend. To test this relation using equation (2C), I first remove all firms that
already pay (do not pay) a dividend when they enter my sample. Additionally, once a
firm begins (stops) paying a dividend, I remove all subsequent (but not preceding) firm-
year observations for that firm. Thus, my sample only contains those firms that either
never (always) pay a dividend or those that initiate (eliminate) a dividend payment at
33
some point in my sample. Additionally, in contrast to the majority of my tests where the
coefficient on DIV is the primary coefficient of interest, in this test I focus on the
coefficient on VOL_CETR since it examines whether firms with more (less) predictable
cash tax payments are more likely to initiate (eliminate) a dividend.
The first three columns contain the result of this analysis for the sample of
dividend initiating firms. In the first column examining the full sample of firms with
available data, I find evidence that firms with more predictable cash ETRs are more
likely to initiate a dividend (p<0.10). However, in the second and third columns
examining a matched sample of dividend-initiating and non-dividend-initiating firms and
an entropy-balanced sample of all firms, I find no evidence of a relation between the
predictability of a firm’s cash ETR and the likelihood that it initiates a dividend payment.
I present results with respect to dividend eliminating firms in the fourth, fifth, and
sixth columns. The fourth column contains the result of examining the full sample of
firms with available data; I find evidence that firms with less predictable cash ETRs are
more likely to eliminate a dividend (p<0.01). However, in the fifth and sixth columns
examining a matched sample19 and an entropy-balanced sample respectively, I find only
limited evidence of a relation between the predictability of a firm’s cash ETR and the
likelihood that it eliminates a dividend payment. Specifically, in the fifth column the
coefficient on VOL_CETR is not statistically significant at the 10% level; however, in the
sixth column, the positive coefficient on VOL_CETR is statistically significant (p<0.01).
19
Dividend-eliminations are extremely rare events and are substantially more rare than dividend initiations.
Due to the small sample size (170 firm pairs), the matched sample analysis for dividend eliminations does
not converge when I include year and industry fixed effects. When I remove fixed effects from the
equation, I obtain convergence and thus report results without any fixed effects for this specification.
34
Collectively, these results fail to indicate consistent evidence that managers
attempt to increase (decrease) the predictability of cash tax payments prior to initiating
(eliminating) a dividend. Additionally, generally failing to find results in these
specifications also partially addresses endogeneity concerns with respect to reverse
causality. However, the results in Table 5, Panels A and B provide strong and consistent
evidence that, once initiated (eliminated), the predictability of these firms’ cash ETRs
increases (decreases). Collectively, I interpret these findings as evidence that managers
seek to increase the predictability of a firm’s cash tax expense in the presence of a
dividend payment.
Table 6 contains the result of testing my third hypothesis. I find evidence that,
relative to financially unconstrained dividend-paying firms, financially constrained
dividend-paying firms exhibit a less positive relation between the predictability of their
cash ETR and their dividend payment. Specifically, I find that the interaction of dividend
payments and financial constraint is positive and significant (p<0.01). When combined
with my previously reported results, this result suggests that the volatility of a firm’s cash
ETRs is decreasing in its dividend payment. However, when a dividend-paying firm is
relatively more financially constrained, this relation weakens (becomes relatively less
negative). I interpret this as evidence of financially constrained dividend-paying firms
prioritizing sustaining their dividend payment at the partial expense of the long-term
predictability of their cash tax expense.
35
VI. ADDITIONAL ANALYSES
Tests Addressing Endogeneity
While my primary findings support my hypotheses, one important concern is that
the endogenous nature of firm dividend policy and firm tax strategy may drive my
findings. In this section, I explicitly address endogeneity concerns and perform a variety
of tests to strengthen the inferences I draw from my primary tests. Specifically, I employ
three alternate econometric techniques designed to mitigate endogeneity concerns and
present the results of these tests in Table 7.
I begin by re-estimating equation (1) on a sample of dividend-paying firms and a
matched control sample of non-dividend-paying firms of comparable size and
profitability and in the same industry and year.20 A matched sample design helps alleviate
the concern that, on average, dividend-paying firms are larger and more profitable than
non-dividend-paying firms and that larger, more profitable firms implement different
types of tax planning strategies and thus exhibit more predictable cash ETRs. I present
the result of this test in the first column of Table 7 and continue to find a negative and
significant relation between the amount of dividends paid by a firm and the volatility of a
firm’s cash ETR (p<0.01).
Alternatively, I re-estimate equation (1) on my primary sample and include firm-
fixed effects. Firm-fixed effects control for unobserved, time-invariant characteristics of a
firm and help mitigate the concern that dividend-paying firms tend to be large, stable
20
Specifically, for each dividend-paying firm-year I match 1:1 without replacement a control firm-year in
the same SIC 2-digit industry and year. From this pool of potential matches, I select the firm-year with the
closest mix (evenly weighted) of size and profitability with a maximum acceptable difference of +/- five
percent on each of these categories. This matching procedure yields a sample of 8,700 firm-year pairs
(17,400 firm-year observations).
36
firms. I present this result in Table 7, column two, and continue to find a negative and
significant relation between the amount of dividends paid by a firm and the volatility of a
firm’s cash ETR (p<0.01).21
Finally, I employ a two-stage least squares instrumental variables specification to
estimate a modified form of equation (1). I select the firm’s sales growth as my
instrument as this variable is uncorrelated with the volatility of a firm’s cash ETR but
negatively correlated with the probability that a firm pays a dividend.22 An instrumental
variables specification helps address endogeneity by developing a predicted value for a
firm’s dividend payments that should be uncorrelated with my error term (the first-stage
regression) and then regressing the volatility of a firm’s cash ETR on the predicted value
of dividend payments as well as control variables (the second-stage regression). Table 7,
column three contains the result of this test; I find a negative and significant relation
between the predicted dividends paid by a firm and the volatility of a firm’s cash ETR
(p<0.01). Collectively, these tests demonstrate that my results are robust to a variety of
alternate econometric specifications designed to mitigate concerns with respect to
endogeneity.
21
In general, I also find that my inferences are unchanged when including firm-fixed effects in equations
(2C) and (3). However, due to the short time series used in equations (2A) and (2B), I find that, when
including firm-fixed effects, my results are directionally consistent but not statistically significant unless I
use a five-year window on either side of a dividend initiation or elimination instead of a three-year window.
When I use a longer window, I continue to find statistically significant results even when including firm-
fixed effects. I attribute the lack of statistical significance when examining a three-year window to not
having a sufficient number of observations (and therefore variation) per firm to detect an effect in the
presence of firm fixed effects.
22
I select sales growth in part because taxes are based on income, not revenue, and thus a change in sales
should be less related than a change in pre-tax income to a firm’s cash tax payments. Additionally, to the
extent that additional sales do not change a firm’s tax planning opportunities, they should be unrelated to
the volatility of a firm’s cash ETR. I do not tabulate the first stage of my IV procedure but this is available
upon request.
37
Additionally, I employ analysis of an exogenous shock as well as counterfactual
analysis to help further address endogeneity concerns. Koo, Ramalingegowda, and Yu
(2016) employ a conceptually similar approach by using SEC rule changes as an
exogenous shock to financial reporting quality and demonstrating that firms with better
financial reporting quality pay higher dividends. I rely on prior research that identifies the
2003 Bush tax cuts as an unexpected shock to firms given that these tax cuts were
unanticipated and that their final passage was uncertain (Brown, Liang, and Weisbenner
2007; Dhaliwal et al. 2007; Campbell, Chyz, Dhaliwal, and Schwartz Jr. 2013).23 Further,
prior research also demonstrates that, relative to preceding years, an abnormally large
number of firms began paying dividends following the passage of these tax cuts (Chetty
and Saez 2005, 2006). Additionally, the Bush tax cuts did not change the corporate tax
rate and thus there is no mechanical relation between their passage and changes in the
volatility of firms’ cash ETRs.24 Accordingly, I use the setting of the Bush tax cuts to
address endogeneity concerns by examining a sample of firms that suddenly and
unexpectedly initiated a dividend payment.
To use the Bush tax cuts as an exogenous shock in my setting, I isolate a
subsample of only those firms that started paying a dividend in either 2003 or 2004. I
then examine a three-year window on either side of the Bush tax cuts and test whether
firms that began paying a dividend in response to the Bush tax cuts subsequently exhibit
23
Specifically, the bill containing these tax cuts, the Jobs and Growth Tax Relief Reconciliation Act of
2003, passed in the House of Representatives with 53.6 percent of the vote (231-200). The vote in the
Senate ended in a 50-50 tie. Vice President Dick Cheney broke the tie in favor of passing this bill.
24
The Bush tax cuts allowed firms to claim more generous depreciation deductions; I control for any
potential impact of these provisions by including a firm’s PP&E intensity as a control variable. Further, if a
firm uses these provisions to decrease its cash ETR, this would, ceteris paribus, be associated with a more
volatile cash ETR and thus bias against finding a decrease in the volatility of a dividend-initiating firm’s
cash ETR.
38
more predictable cash ETRs.25 Additionally, while my dividend payout variable only
captures regular dividends, many firms also paid a special (one-time) dividend in
response to the Bush tax cuts. I create an additional variable, SPEC_DIV, equal to the
amount of special dividends paid by the firm divided by its stock price, and analyze
whether firms paying a special dividend also exhibit more predictable cash ETRs.26 I then
re-estimate equation (2A) on this sample and expect that regular, but not special,
dividends initiated in response to the Bush tax cuts are associated with more predictable
cash ETRs as I expect that only regular dividends generate capital market pressure to
increase the predictability of a firm’s cash ETR.
I find evidence consistent with this expectation and report this result in the first
column of Table 8. Regular dividend payments initiated in response to the 2003 Bush tax
cuts are negatively related to the subsequent volatility of a firm’s cash ETR (p<0.05). In
contrast, special dividends exhibit no statistically significant relation to the volatility of a
firm’s cash ETR.27
Building on the idea that there is a positive relation between dividend payouts and
the predictability of a firm’s cash ETR, I also examine the relation between share
repurchases and the predictability of a firm’s cash ETR. To the extent that managers view
both share repurchases and special dividends as non-recurring events, I expect that
managers will not respond to them by attempting to increase the predictability of a firm’s
25
In untabulated analysis, I examine the year prior to the Bush tax cuts and use a t-test to examine the
average cash ETR volatility for firms that initiated a dividend in response to the Bush tax cuts and a
matched sample of non-dividend-initiating firms based on industry, size, and profitability. I fail to find a
statistically significant difference in the average cash ETR volatility of these two groups.
26
I classify a dividend as a special dividend if the distribution code from CRSP is between 1270 and 1299
inclusive. Codes 1270-1299 represent ordinary (i.e., not as the result of a liquidation, reorganization, stock
split, etc…) cash dividends paid in U.S. dollars with an extra, special, interim, or non-recurring frequency.
27
Additionally, I use an F-test to evaluate whether the coefficients on DIV and SPEC_DIV are different
from each other and find that this is the case (p<0.01).
39
cash tax payments. To test this assertion, I examine my primary sample of dividend-
paying and non-dividend-paying firms and re-estimate equation (1) with the inclusion of
an additional explanatory variable, REP. I define this variable as the per-share amount of
a firm’s stock repurchases divided by its stock price.28
The second column of Table 8 contains the result of this test. I continue to find a
negative relation between dividend payments and the volatility of the firm’s cash ETR
(p<0.01); however, I fail to identify a statistically significant relation between the amount
of stock repurchases made by the firm and the volatility of the firm’s cash ETR.29 I
interpret this as evidence that regular dividends, but not share repurchases, are associated
with more predictable cash tax payments.
Tax Strategies Used by Dividend-Paying Firms
While my previous tests support the idea that dividend-paying firms increase the
predictability of their cash tax expense, they do not explore how dividend-paying firms
might accomplish this objective. In this section, I examine several tax strategies dividend-
paying firms may use to increase the predictability of their future cash tax expense. In
general, I contend that relatively more aggressive forms of tax planning are more
uncertain and more volatile (Inger 2014; Saavedra 2015). Thus, I expect that dividend-
paying firms engage in less of these types of tax strategies as they do not align with the
strategic objective of maintaining predictable future tax cash flows.
28
Specifically, I follow Fama and French (2001)’s definition of stock repurchases as the annual change in a
firm’s treasury stock. If this amount is not available or it is less than 0, I define stock repurchases as the
difference between purchases and sales of common stock.
29
As in the first column, I use an F-test to evaluate whether the coefficients on DIV and REP are different
from each other and find that this is the case (p<0.01).
40
In Table 9, I examine three specific tax strategies. I begin by examining the
amount of a firm’s book-tax differences, BTD, a proxy for total tax planning (Mills
1998). Further, because I am interested in the tax planning activities of dividend-paying
firms, I restrict my sample to only firms that pay a dividend. If dividend-paying firms
actively manage their cash ETR to increase its predictability, I expect that this behavior is
associated with higher overall amounts of tax planning and thus higher book-tax
differences.
I also examine two specific proxies for aggressive tax planning. First, I use DTAX,
the amount of discretionary book-tax differences as defined by Frank et al. (2009). In
contrast to total book-tax differences, higher discretionary book-tax differences imply
that a firm engages in more aggressive tax planning strategies (Desai and Dharmapala
2006; Frank et al. 2009; Chen, Chen, Cheng, and Shevlin 2010). As in my test examining
BTD, I limit my sample in this test to firms that pay a dividend. Second, I use SHELTER,
the probability that a firm engages in a tax-shelter per Wilson (2009). Tax shelters
represent an extremely aggressive (and potentially illegal) form of tax planning (Wilson
2009; Lisowsky 2010; Lisowsky, Robinson, and Schmidt 2013). I argue that both of these
metrics represent aggressive forms of tax planning that may be disallowed upon audit
thus resulting in a less predictable cash ETR. Additionally, in this test, I also examine the
difference between dividend-paying and non-dividend paying firms by matching my
sample of dividend paying firms to a sample of otherwise similar non-dividend-paying
firms based on industry, year, and size. If dividend-paying firms avoid aggressive forms
of tax planning, I expect that they exhibit lower discretionary book-tax differences as
well as a lower likelihood of engaging in a tax shelter.
41
I find results consistent with these expectations. Specifically, in the first column
of Table 9, I find a positive and significant relation between the amount of dividends a
firm pays and total book-tax differences (p<0.01). This suggests that dividend-paying
firms do no forego all types of tax planning activities. However, in the second and third
columns, I find a negative and significant relation between the amount of dividends a
firm pays and two measures of aggressive tax planning: discretionary book-tax
differences (p<0.10) and the probability that a firm engages in a tax shelter (p<0.01).
Collectively, I interpret these results as evidence that dividend-paying firms select
specific tax strategies designed to provide long-term, predictable cash tax benefits and
avoid highly aggressive tax strategies that tend to be uncertain.
Relative Importance of Dividend Payments
In untabulated analysis, I re-estimate my primary specification examining the
relation between the volatility of a firm’s cash ETR and its dividend payments based on
standardized coefficients. Specifically, I standardize all variables to have a mean of zero
and a standard deviation of one. This permits a direct comparison on the relative
importance of my proposed determinants of the volatility of a firm’s cash ETR. I then re-
estimate equation (1) and rank all variables by the absolute magnitude of the resulting
coefficient. Out of the twelve proposed determinants, I find that the firm’s dividend
payments are the fifth most important factor. In order, PT_ROA, VOL_PT_ROA, SIZE,
and IND_CETR have a larger coefficient than the coefficient on a firm’s dividend
payment. In contrast, VOL_CF, PP&E, MTB, ESO_BEN, R&D, LEV, and CASH have a
42
smaller coefficient than the coefficient on a firm’s dividend payment.30 While I do not
have an ex-ante expectation as to the relative importance of a firm’s dividend payments
in explaining the volatility of a firm’s cash ETR, this analysis implies that it is important
to consider a firm’s dividend policy as this variable appears to be of similar or greater
importance than many variables commonly used to explain the volatility of a firm’s cash
ETR.
Dividend Payments and the Level of a Firm’s Cash ETR
Additionally, in untabulated analysis, I re-estimate my primary specification
examining the relation between the volatility of a firm’s cash ETR and its dividend
payments but substitute the average three-year level of a firm’s cash ETR instead of the
volatility of its three-year cash ETR. To the extent that less volatile cash ETRs also imply
lower mean cash ETRs, dividend-paying firms may attempt to increase firm value by
reducing their average cash tax burden rather than attempt to increase the predictability of
their cash tax payments (Smith and Stulz 1985; Nance, Smith, and Smithson 1993;
Graham and Smith 1999). However, in contrast, it is also possible that there is no relation
between the volatility of a firm’s cash ETR and the level of its cash ETR and thus no
association between dividends and levels of cash ETR (Graham and Rogers 2002;
Guenther et al. 2017; Guenther, Wilson, and Wu 2016). In my setting, I fail to identify a
relation between the amount of dividends a firm pays and the level of its cash ETR. Thus,
30
I also test whether dividend yield is statistically different in absolute magnitude from the other
determinants included in this specification. I find that dividend yield is significantly smaller in absolute
magnitude than IND_CETR and all other variables of higher importance (p<.01), not statistically different
in absolute magnitude than VOL_CF, and significantly greater in absolute magnitude than PP&E and all
other variables of lower importance (p<.01).
43
my results are consistent with the idea that dividend-paying firms seek more predictable
cash payments but not necessarily lower cash tax payments.
Alternate Specifications
Finally, in untabulated analysis, I also examine a variety of alternate variable
definitions and model specifications. First, I note that, in my primary analysis, I use a
one-year measure for a firm’s dividend payments but a three-year measure for the
volatility of a firm’s cash ETR. Thus, if a firm changes its dividend policy and tax
strategy in time t, my measure of dividends immediately captures this change but my
measure of the volatility of the firm’s cash ETR only captures approximately one-third
of this change. I re-estimate my primary tests using the average amount of dividends paid
by the firm over three years and I find consistent results. Second, I acknowledge that
managers may focus on dividends per share instead of dividend yield. Accordingly, I re-
estimate my primary tests using the firm’s per-share amount of dividends instead of its
dividend yield and, in untabulated analysis, I find consistent results. Third, I recognize
that paying a dividend represents a strong commitment to capital market participants to
continue paying a dividend and that tax strategies may take several years to implement.
Accordingly, I perform my analyses using five-year measures of cash ETR volatility and
dividends and find that my inferences remain unchanged. Fourth, while prior literature
generally scales tax payments by pre-tax income, this specification makes it difficult to
draw inferences from loss firms as well as introduces potential denominator effects. To
partially address this issue, I re-test my primary specifications and scale total cash tax
payments by total assets and find that my inferences remain unchanged.
44
VII. CONCLUSION
Dividend payments are extremely important to capital market participants and the
subject of extensive academic research. In this study, I add to prior literature by
identifying the relation between dividend payments and a specific firm strategy, the
predictability of a firm’s cash tax expense. I find a positive relation between the amount
of dividends a firm pays and the predictability of its cash tax expense. This result holds
across a wide range of settings including alternate econometric specifications designed to
mitigate endogeneity concerns as well when examining the effect of the exogenous shock
to dividend incentives of the 2003 Bush tax cuts.
Additionally, I find strong evidence that the predictability of a firm’s cash ETR
increases (decreases) after the initiation (elimination) of a dividend payment. Moreover, I
find that, for dividend-paying firms, relative financial constraint moderates the positive
relation between a firm’s dividend payments and the predictability of its cash ETR.
Finally, I find that, while dividend-paying firms engage in more overall tax planning, this
planning tends to focus on strategies that are relatively less aggressive.
My results contribute to the literature in several ways. I demonstrate a link
between dividend payments and a specific firm strategy, the predictability of a firm’s
cash ETR. I also extend the literature examining why some firms may choose to pursue a
tax strategy focused on sustainability and predictability. Finally, I contribute to ongoing
public policy debates by highlighting a benefit of dividend payments – these payments
are associated with more predictable future cash tax payments. Such a finding is
especially timely given the large number of recent proposals designed to either
incentivize or de-incentivize dividend payments.
45
Appendix: Variable Definitions
Dependent
Definition
Variables
The three-year standard deviation of a firm's cash effective tax rate
VOL_CETR
(TXPD/(PI-SPI)) from t-2 to t.
An indicator variable equal to one if a firm pays a dividend in the
NEW_DIV
current year but did not pay a dividend in either t-2 or t-1.
An indicator variable equal to one if a firm does not pay a dividend
STOP_DIV in the current year but did pay a dividend in both t-2 and t-1.
The difference between a firm's book income and its taxable

income scaled by total assets (AT). Book income is a firm's pre-tax
income (PI). Taxable income is a firm's tax expense (either TXFED
BTD + TXFO - (TLCF - lag TLCF) or, for missing/zero values of
TXFED, TXT - TXDI - TXS - TXO) scaled by the top corporate
income tax rate.
The amount of a firm's discretionary book-tax differences

DTAX
following Frank et al. (2009).
SHELTER The firm's tax shelter score following Wilson (2009).
Independent
Variables of Interest
The sum of all of a firm's per-share dividend payments from CRSP
(DIVAMT) for the fiscal year divided by the firm's stock price.
DIV Only regular dividends (DISTCD 1200-1259 inclusive) are
included.
The firm's Z-Score calculated following Altman (1968) and

implemented as follows:
Z_SCORE = 3.3*(PI+XINT)/at + 1.2*(WCAP/AT) +

Z_SCORE
0.99*(SALE/AT) + 1.4*(RE/AT) + 0.6*(MKVALT/LT)
This variable is multiplied by negative one so that higher values for

Z_SCORE imply greater financial distress.
An indicator variable equal to one if a dividend-paying firm's Z-
SCORE is in the top half of Z-SCOREs for all dividend-paying
CONSTRAIN
firms.
The sum of all of a firm's per-share special dividend payments from

CRSP (DIVAMT) for the fiscal year divided by the firm's stock
SPEC_DIV
price. Only special dividends (DISTCD 1270-1299 inclusive) are
included.
46
The firm's per-share repurchases following Fama and French
(2001) divided by the firm's stock price. Specifically, repurchases
are the annual change in treasury stock (TSTKC - lag TSTKC). If
REP
this amount is less than or equal to zero, repurchases are the
difference between purchases and sales of common stock
(PRSTKC - SSTK).
Control Variables
The three-year standard deviation of a firm's cash flows from
VOL_CF
operations scaled by total assets (OANCF/AT) from t-2 to t.
PT_ROA The firm's pre-tax return on assets (PI/AT).

The three-year standard deviation of a firm's pre-tax return on
VOL_PT_ROA
assets (PT_ROA) from t-2 to t.
SIZE The natural logarithm of a firm's total assets (log(AT)).
The firm's net property, plant, and equipment scaled by total assets
PP&E
(PPENT/AT).
The firm's research and development expense scaled by total assets
R&D
(XRD/AT). If this variable is missing, I set it equal to zero.
LEV The firm's long term debt scaled by total assets (DLTT/AT).
The firm's market value of equity scaled by the firm's book value of
MTB
equity (MKVALT/CEQ).
The firm's tax benefit from employee stock options scaled by total
ESO_BEN
assets (TXBCOF/AT). If this is missing, I set it equal to zero.
The firm's cash effective tax rate (TXPD/(PI-SPI)) less the average
IND_CETR cash effective tax rate for other firms in the same industry (Fama-
French 48 classification) and year.
CASH The firm's total cash holdings scaled by total assets (CHE/AT).
The firm's size based on its relative market value - specifically, the
MK_PCTL percentage of all firm's in Compustat with a smaller market
capitalization (MKVALT).
AT_GROWTH The firm's growth in total assets ((AT - lag AT)/lag AT).
47
Figure 1
Panel A: Average VOL_CETR Before and After Initiating a
Dividend
0.4
0.3
VOL_CETR
0.2
0.1
0
-5 -4 -3 -2 -1 0 1 2 3 4 5
Year Relative to Dividend Initiation
VOL CETR T-5 VOL_CETR
Panel B: Average VOL_CETR Before and After Eliminating a

Dividend
1.1
1
0.9
0.8
VOL_CETR
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
-5 -4 -3 -2 -1 0 1 2 3 4 5
Year Relative to Dividend Elimination
VOL_CETR T-5 VOL_CETR

Notes: These graphs depict the average volatility of a firm’s cash ETR from five years prior to an event date
(the initiation or the elimination of a dividend) until five years after the event date.
Panel A contains the result of graphing the volatility of a dividend-initiating firm’s cash ETR before and after
the initiation of a dividend. For ease of interpretation, I also include a solid line representing the volatility of my
mean dividend-initiating firm’s cash ETR at t = -5, five years before the initiation of a dividend.
Panel B contains the result of graphing the volatility of a dividend-eliminating firm’s cash ETR before and after
the cessation of a dividend. For ease of interpretation, I also include a solid line representing the volatility of my
mean dividend-eliminating firm’s cash ETR at t = -5, five years before the elimination of a dividend.
48
TABLE 1
Sample Selection
1987 through 2015 firm years with a valid primary identifier, positive assets, 180,349
a post SFAS 95 statement of cash flows, and not in a regulated industry (SIC
6000-6999 or SIC 4900-4999)
Less: firm years lacking information necessary to compute lagged values -40,183
Less: firms missing dependent or independent variables of interest, control -66,778

variables, or with extreme cash ETRs (cash ETRs < 0 or cash ETRs > 1)
Total observations with all required information 73,388
Less: firm years for loss firms (negative cumulative 3-year pre-tax income) -15,810
or small firms (assets<$500,000 or book equity < $250,000)
Total Observations for Primary Tests 57,578

Notes: I summarize my sample selection process in this table.
All variables are defined in the Appendix and taken from Compustat with the exception of firm dividends, which are
taken from CRSP. Only CRSP dividends with a distribution code (DISTCD) between 1200 and 1259 inclusive are
included.
A post SFAS 95 statement of cash flows is necessary to compute several variables, including a firm's cash ETR. I
remove firms with extreme cash ETRs following Guenther et al. (2017). I remove small firms following Fama and
French (2001).
49
TABLE 2
Descriptive Statistics
Variable N Mean Std Dev P25 Median P75
VOL_CETR 57,578 0.1889 0.4061 0.0401 0.0831 0.1688

DIV 57,578 0.0082 0.0151 0.0000 0.0000 0.0119
VOL_CF 57,578 0.0492 0.0448 0.0191 0.0355 0.0632
PT_ROA 57,578 0.0979 0.0869 0.0455 0.0862 0.1411
VOL_PT_ROA 57,578 0.0485 0.0545 0.0158 0.0309 0.0589
SIZE 57,578 6.0523 2.0733 4.5736 5.9697 7.4544
PP&E 57,578 0.2795 0.2252 0.1023 0.2153 0.3978
R&D 57,578 0.0257 0.0455 0.0000 0.0000 0.0319
LEV 57,578 0.1620 0.1619 0.0045 0.1270 0.2676
MTB 57,578 2.8968 2.7641 1.3107 2.0835 3.3926
ESO_BEN 57,578 0.0006 0.0022 0.0000 0.0000 0.0000
IND_CETR 57,578 0.0900 0.3494 -0.0617 0.0809 0.2187
CASH 57,578 0.1526 0.1693 0.0254 0.0865 0.2240
NEW_DIV 57,578 0.0252 0.1567 0.0000 0.0000 0.0000
STOP_DIV 57,578 0.0069 0.0825 0.0000 0.0000 0.0000
MK_PCTL 57,578 66.0610 24.4130 49.5403 71.0480 86.2231
AT_GROWTH 57,578 0.1915 0.3735 0.0104 0.0928 0.2300
Z_SCORE 52,323 -5.1914 4.8930 -5.8847 -3.8026 -2.5312
CONSTRAIN 22,142 0.4951 0.4988 0.0000 0.0000 1.0000
SG 57,498 0.1607 0.2796 0.0140 0.1008 0.2331
SPEC_DIV 57,578 0.0082 0.0151 0.0000 0.0000 0.0119
REP 57,576 0.0129 0.0306 0.0000 0.0000 0.0089
BTD 47,006 0.0207 0.1273 -0.0092 0.0168 0.0490
DTAX 25,818 0.2656 1.7419 -0.0363 0.0053 0.0940
SHELTER 47,006 -0.2128 1.5824 -1.1952 -0.2375 0.7816
Notes: I present descriptive statistics with respect to the full sample of firms in this table. See Table 1 for the sample
selection process.
See the Appendix for a more detailed discussion of each variable. All continuous variables are winsorized at the 1%
and 99% levels.
50
TABLE 3
Correlation Matrix (n=57,578)
Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) VOL_CETR 1
(2) DIV -0.06 1
(3) VOL_CF 0.08 -0.15 1
(4) PT_ROA -0.14 0.00 0.11 1
(5) VOL_PT_ROA 0.11 -0.10 0.44 0.00 1
(6) SIZE -0.09 0.20 -0.40 -0.09 -0.24 1
(7) PP&E -0.04 0.16 -0.18 -0.07 -0.11 0.15 1
(8) R&D 0.01 -0.13 0.11 0.04 0.19 -0.11 -0.30 1
(9) LEV 0.01 0.11 -0.21 -0.31 -0.12 0.30 0.32 -0.28 1
(10) MTB -0.07 -0.02 0.05 0.36 0.08 0.11 -0.08 0.16 0.05 1
(11) ESO_BEN -0.05 -0.04 -0.05 0.16 -0.03 0.09 -0.11 0.08 -0.08 0.19 1
(12) IND_CETR 0.04 0.00 -0.01 0.03 -0.02 0.01 -0.02 -0.02 -0.04 -0.03 -0.02 1
(13) CASH 0.00 -0.13 0.19 0.24 0.21 -0.20 -0.37 0.40 -0.44 0.16 0.14 0.00 1
Notes: This table contains Pearson correlations among variables of interest and control variables. See Table 1 for the sample selection process.
Correlations in bold are statistically significant in at the 5% level or better. See the Appendix for a more detailed discussion of each variable. I winsorize all
continuous variables at the 1% and 99% levels.
51
TABLE 4
The Effect of Dividends on Volatility of Cash ETRs
(1) (2) (3)
No Small/Loss Dividend-
All Firms Firms Paying Firms
Dependent Variable = VOL_CETR Coefficient Coefficient Coefficient
t-stat t-stat t-stat
INTERCEPT 0.2492*** 0.3054*** 0.2421***
8.31 8.12 5.46
DIV -1.6544*** -1.0920*** -0.7318***
-11.15 -7.81 -6.30
VOL_CF -0.0415*** 0.3020*** 0.7029***
-5.27 4.81 6.68
PT_ROA 0.0120*** -0.6756*** -0.6871***
5.44 -23.53 -18.89
VOL_PT_ROA -0.0159*** 0.5758*** 0.9689***
-5.70 10.64 11.12
SIZE -0.0034*** -0.0114*** -0.0107***
-2.98 -8.50 -7.51
PP&E -0.0734*** -0.0427*** -0.0036
-5.63 -3.02 -0.25
R&D -0.0966*** -0.0651 0.1104
-3.87 -0.97 1.07
LEV 0.0534*** 0.0271 -0.0152
4.31 1.53 -0.82
MTB -0.0035*** -0.0021** -0.0015
-9.41 -2.57 -1.61
ESO_BEN -7.5425*** -2.1878*** -0.0468
-9.21 -2.92 -0.04
IND_CETR 0.0787*** 0.0643*** 0.0195***
14.15 11.79 4.31
CASH -0.0131 0.0135 0.0275
-0.97 0.79 1.35
Industry and Year Fixed Effects Yes Yes Yes
Clustered Standard Errors Firm Firm Firm
Observations 73,388 57,578 21,512
Adjusted R-Squared 2.13% 4.80% 9.56%
Notes: This table contains the result of estimating equation (1) to test my first hypothesis; I expect a negative relation
between DIV and VOL_CETR.
In the first column, I present the result with respect to a sample that includes loss firms (cumulative three-year loss)
and small firms (< $500,000 in assets or < $250,000 in book equity). In the second column, I present the result based
on a sample excluding these firms. In the third column, I present the result for a sample of dividend-paying firms (DIV
> 0).
See the Appendix for a more detailed discussion of each variable. I winsorize all continuous variables at the 1% and
99% levels. The symbols *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels respectively. I
include industry and year fixed effects and cluster standard errors at the firm level.
52
TABLE 5
Panel A: The Effect of Dividends on Volatility of Cash ETRs Pre- and Post-
Dividend Initiation
(1)
Dividend-Initiating Firms
Dependent Variable = VOL_CETR Coefficient
t-stat
INTERCEPT 0.2019**
4.81
DIV -0.8698***
-4.02
VOL_CF 0.2705*
1.93
PT_ROA -0.6801***
-8.82
VOL_PT_ROA 0.8402***
6.54
SIZE -0.0115***
-3.62
PP&E -0.0356
-1.53
R&D -0.0065
-0.03
LEV 0.0040
0.12
MTB 0.0033
1.21
ESO_BEN 0.5209
0.28
IND_CETR 0.0336***
3.54
CASH 0.0133
0.35
Industry and Year Fixed Effects Yes
Clustered Standard Errors Firm
Observations 6,382
Adjusted R-Squared 6.99%
53
TABLE 5
Panel B: The Effect of Dividends on Volatility of Cash ETRs Pre- and Post-
Dividend Elimination
(1)
Dividend-Eliminating Firms
t-stat
INTERCEPT 0.6192**
2.24
DIV -1.884***
-5.29
VOL_CF 0.5164
1.40
PT_ROA -0.4332***
-3.22
VOL_PT_ROA 0.0197
0.12
SIZE -0.0175**
-2.13
PP&E -0.1812**
-2.05
R&D 0.7541
1.20
LEV -0.0571
-0.91
MTB -0.0050***
-2.62
ESO_BEN -20.2218***
-2.64
IND_CETR 0.0232
0.58
CASH -0.1328
-1.16
Observations 2,723
54
TABLE 5
Panel C: Effect of Volatility of Cash ETRs on the Likelihood of Dividend Initiations and Eliminations
(1) (2) (3) (4) (5) (6)
Matched Entropy- Full Matched Entropy-
Dependent Variable = Full Controls Sample Balanced Controls Sample Balanced
P(NEW_DIV=1) Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient
z-stat z-stat z-stat z-stat z-stat z-stat
INTERCEPT -4.6768*** -0.5341 0.0294 -4.5363*** -1.3945** 0.2638
-28.47 -1.41 0.04 -16.43 -2.14 0.40
VOL_CETR -0.1354* -0.0949 -0.0164 0.5148*** -0.0137 0.1032***
-1.86 -0.76 -0.92 5.27 -0.14 3.23
PT_ROA 4.7793*** 2.3385* 0.0553 -4.7615*** 1.5669 -0.1848
11.79 1.91 0.14 -7.20 0.67 -0.44
MTB -0.0193 -0.0127 -0.0016 -0.0412 -0.0165 -0.0007
-1.33 -0.38 -0.38 -1.40 -0.75 -0.44
MK_PCTL 0.0067* 0.0019 0.0074** -0.0576*** -0.0157 -0.0047
1.90 0.23 2.21 -13.00 -1.60 -1.16
AT_GROWTH -0.8122*** -0.7808*** -0.4649*** -0.0068 -0.3488 -0.0091
-5.41 -3.43 -2.66 -0.04 -0.83 -0.07
VOL_CF -0.6793 -1.8394 0.6941 6.8091*** 4.5180 0.0250
-0.84 -1.09 0.89 4.89 1.13 0.02
VOL_PT_ROA -0.9458 -1.6178 0.079 6.6862*** 15.3879*** -0.1178
-1.56 -1.04 0.2 7.26 3.63 -0.19
SIZE 0.1244*** -0.0374 -0.097** 0.4441*** 0.2419** 0.0740
2.90 -0.35 -2.32 7.96 1.99 1.39
PP&E 0.4198** 0.9630** -0.0207 -0.5459* -0.7042 -0.3925
2.22 2.31 -0.11 -1.85 -1.14 -1.24
R&D -5.1658*** -2.9983* -0.0705 2.4849 -0.7549 -0.5653
-4.99 -1.81 -0.07 1.32 -0.19 -0.40
LEV 0.5325** -0.1944 0.2555 1.6358*** 0.2882 0.1183
2.34 -0.4 1.18 4.99 0.44 0.67
ESO_BEN -45.9115*** -72.9887** -3.518 -47.9002 -178.1000 3.8452
-3.29 -2.18 -0.34 -0.66 -1.60 0.15
55
IND_CETR -0.0265 0.1026 0.0065 -0.1544 -0.2237 -0.0619
-0.30 0.59 0.45 -1.36 -0.52 -0.47
CASH 0.4045* -0.1893 0.0858 0.5930 1.6381 0.5745
1.89 -0.45 0.38 1.30 1.29 1.22
Industry and Year Fixed Effects Yes Yes Yes Yes No Yes
Clustered Standard Errors Firm Firm Firm Firm Firm Firm
Observations 35,296 1,396 35,296 21,741 340 21,741
Pseudo R-Squared 10.36% 7.93% 6.09% 26.34% 16.86% 6.47%
Area Under ROC Curve 74.90% 63.30% 66.72% 84.80% 70.50% 67.27%
Notes: This table contains the result of estimating equations (2A-2C) to test my second hypothesis.
In Panel A, I present the result of the first part of my second hypothesis. I expect a negative relation between DIV and VOL_CETR. I test this relation using a sample of
firms that begin paying a dividend at some point during my sample. I then isolate a period of three years prior to the initiation of the dividend until three years after the
initiation of the dividend.
In Panel B, I present the result of the second part of my second hypothesis. I expect a negative relation between DIV and VOL_CETR. I test this relation using a sample
of firms that stop paying a dividend at some point during my sample. I then isolate a period of three years prior to the cessation of the dividend until three years after the
cessation of the dividend.
In Panel C, I present the results of analyzing a sample of prior to the initiation (elimination) of a dividend in columns one, two, and three (columns four, five, and six). I
test this relation using a sample of firms that do not (do) pay a dividend during my sample period and those that start (stop) paying a dividend during my sample period.
Once a firm begins (ceases) paying a dividend, I remove all subsequent firm-years for that firm from my analysis. The first (last) three columns contain the result of
estimating equation 2(C) on a sample of all firms with available data, a sample of dividend-initiating (eliminating) and non-dividend-initiating (eliminating) firms in the
same industry and year matched by firm size and profitability, and a sample of all firms with available data using entropy-balanced re-weighted coefficients for all
control variables respectively.
See the Appendix for a more detailed discussion of each variable. I winsorize all continuous variables at the 1% and 99% levels. The symbols *, **, and *** denote
statistical significance at the 10%, 5%, and 1% levels respectively. I include industry and year fixed effects and cluster standard errors at the firm level. Z-statistics
(Panel C) are the positive square root of the equivalent Wald Chi-Square statistic multiplied by the sign of the associated coefficient.
56
TABLE 6
Influence of Financial Constraint on Relation between Dividends and Volatility of
Cash ETRs
Dividend-Paying Firms
t-stat
INTERCEPT 0.2427***
5.34
DIV -0.9845***
-8.08
CONSTRAIN 0.0223***
3.26
DIV*CONSTRAIN 0.5311***
2.61
VOL_CF 0.7133***
6.64
PT_ROA -0.6219***
-17.18
VOL_PT_ROA 0.8131***
9.38
SIZE -0.0121***
-8.06
PP&E -0.0032
-0.22
R&D 0.1558
1.45
LEV -0.0401**
-2.25
MTB -0.0010
-1.10
ESO_BEN -0.2975
-0.28
IND_CETR 0.0222***
4.74
CASH 0.0549***
2.59
Test: Total Effect of DIV -0.4534**
2.51
Test: Total Effect of CONSTRAIN 0.5534***
2.78
Observations 22,142
Notes: This table contains the result of estimating equation (3) to test my third hypothesis; I expect that CONSTRAIN moderates the
negative relation between DIV and VOL_CETR. I test this relation using a sample of dividend-paying firms.
See the Appendix for a more detailed discussion of each variable. I winsorize all continuous variables at the 1% and 99% levels. The
57
symbols *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels respectively. I include industry and year fixed
effects and cluster standard errors at the firm level.
58
TABLE 7
Alternate Econometric Specifications: Effect of Dividends on Volatility of Cash
ETRs
(1) (2) (3)
Matched Sample Firm Fixed Effects IV
Dep. Variable = VOL_CETR Coefficient Coefficient Coefficient
INTERCEPT 0.2565*** 0.3051** 0.2038***
8.17 2.53 6.05
DIV -0.7360*** -1.1295***
-3.85 -6.35
PRED_DIV -3.8087***
-3.38
VOL_CF 0.4404*** 0.3622*** 0.2640***
3.78 6.84 4.09
PT_ROA -1.1087*** -0.5776*** -0.6889***
-16.32 -21.54 -23.13
VOL_PT_ROA 1.2120*** 0.5881*** 0.6191***
10.27 14.66 11.57
SIZE -0.0122*** -0.0384*** -0.0098***
-5.37 -10.24 -5.42
PP&E -0.0260 -0.0291 -0.0064
-1.24 -1.12 -0.38
R&D 0.0277 -0.2960*** -0.0446
0.26 -2.78 -0.66
LEV -0.0175 0.0518*** 0.0421**
-0.64 2.68 2.38
MTB -0.0003 -0.0018** -0.0012
-0.20 -1.97 -1.41
ESO_BEN -0.6395 -2.4432** -3.0520***
-0.56 -2.56 -3.62
IND_CETR 0.0530*** 0.1312*** 0.2724***
5.91 11.72 20.65
CASH 0.0085 0.0135 0.0238
0.36 0.79 1.43
Industry and Year Fixed Effects Yes Yes Yes
Firm Fixed Effects No Yes No
Clustered Standard Errors Firm Firm Firm
Observations 17,478 57,578 57,578
59
Notes: This table contains the result of re-estimating alternate econometric specifications with respect to my first
hypothesis; across all specifications, I expect a negative relation between DIV and VOL_CETR.
In the first column, I re-estimate equation (1) on a matched sample of dividend-paying firms and non-dividend-
paying control firms. I match without replacement every dividend-paying firm-year to a control firm in the same
year and industry with the closest (equal weighted) match based on SIZE and PT_ROA. Matches must be within +/-
5% on both of these dimensions to be accepted.
In the second column, I re-estimate equation (1) and include firm fixed effects.
In the third column, I re-estimate equation (1) based on a 2SLS IV specification. I do not tabulate the first stage of
this regression. I use sales growth, SG to satisfy the exclusion restriction. Untabulated analysis indicates that SG is
negatively correlated with DIV but uncorrelated with VOL_CETR.
include industry and year fixed effects in all specifications. I include firm fixed effects in the second column. I
cluster standard errors at the firm level.
60
TABLE 8
Alternate Samples: Effect of Dividends on Volatility of Cash ETRs
(1) (2)
Bush Tax Cuts Share Repurchases
Dependent Variable = VOL_CETR Coefficient Coefficient
t-stat t-stat
INTERCEPT 0.4097*** 0.3059***
3.60 8.14
DIV -2.2137** -1.0893***
-2.46 -7.78
SPEC_DIV 0.5608
1.13
REP -0.0494
-0.79
VOL_CF 0.1024 0.3017***
0.26 4.81
PT_ROA -0.5857*** -0.6740***
-3.43 -23.43
VOL_PT_ROA 0.8781** 0.5764***
2.46 10.65
SIZE -0.0178* -0.0113***
-1.75 -8.43
PP&E -0.1548** -0.0430***
-2.01 -3.04
R&D 0.3486 -0.0639
0.47 -0.95
LEV 0.0009 0.0276
0.01 1.56
MTB -0.0000 -0.0022***
-0.01 -2.61
ESO_BEN -3.8474 -2.1520***
-1.47 -2.86
IND_CETR 0.0169 0.0644***
0.67 11.79
CASH -0.1997*** 0.0135
-2.91 0.79
Test: DIV - SPEC_DIV -2.7745***
-2.68
Test: DIV - REP -1.0669***
-6.94
Industry and Year Fixed Effects Yes Yes
Clustered Standard Errors Firm Firm
Observations 1,128 57,578
Adjusted R-Squared 6.38% 4.80%
61
Notes: This table contains the result of estimating my results on alternate samples; across all specifications, I expect a
negative relation between DIV and VOL_CETR.
In the first column, I re-estimate equation (2B) on a sample of firms that initiate a new dividend in response to the
Bush tax cuts.
In the second column, I re-estimate equation (1) and include an additional explanatory variable for share repurchases,
REP.
include industry and year fixed effects and cluster standard errors at the firm level.
62
TABLE 9
Effect of Dividends on Firm Tax Strategies
(1) (2) (3)
Dividend- Dividend- Matched
Paying Firms Paying Firms Sample
Dependent Variable = BTD DTAX SHELTER
Coefficient Coefficient Coefficient
INTERCEPT -0.0459*** 0.4969*** -0.1662
-4.42 4.74 -0.73
DIV 0.1643*** -1.0110* -5.6645***
3.12 -1.69 -5.3
VOL_CF 0.0620** -0.2393 -5.7367***
2.54 -0.54 -14.79
PT_ROA 0.2593*** 1.5639*** 3.8442***
16.69 9.58 18.66
VOL_PT_ROA -0.0850*** 0.5510 -2.2206***
-3.08 1.47 -6.59
SIZE 0.0021*** -0.0106
4.42 -1.37
PP&E 0.0325*** -0.1269* 0.3016***
7.66 -1.75 2.89
R&D 0.0128 -1.0157** 3.3925***
0.31 -2.19 6.10
LEV 0.0437*** -0.0661 -0.1327
7.75 -0.79 -1.33
MTB -0.0013*** 0.0033 0.0373***
-3.61 0.72 6.15
IND_CETR -0.0146*** 0.0560* -0.1390***
-9.69 1.79 -5.06
CASH 0.0121* -0.1551 -0.5772***
1.71 -1.43 -4.66
Industry and Year Yes Yes Yes
Fixed Effects
Clustered Standard Firm Firm Firm
Errors
Observations 18,438 10,232 19,172
Notes: This table contains the result of re-estimating slightly modified forms of equation (1)
on different dependent variables.
In the first column, I use BTD as the dependent variable and estimate this regression on a
sample of dividend-paying firms.
In the second column, I use DTAX as the dependent variable and estimate this regression on
a sample of dividend-paying firms.
In the third column, I use SHELTER as the dependent variable and estimate this regression
on a matched by industry, year, and size sample of divided-paying firms and non-dividend
63
paying control firms. I exclude SIZE from this regression as it is a primary input in the
calculation of SHELTER.
See the Appendix for a more detailed discussion of each variable. I winsorize all continuous
variables at the 1% and 99% levels. The symbols *, **, and *** denote statistical
significance at the 10%, 5%, and 1% levels respectively. I include industry and year fixed
effects and cluster standard errors at the firm level.
64
REFERENCES
Aggarwal, R., J. Cao, and F. Chen. 2012. Information environment, dividend changes,
and signaling: Evidence from ADR firms. Contemporary Accounting Research 29
(2):403-431.
Aivazian, V., L. Booth, and S. Cleary. 2006. Dividend smoothing and debt ratings.
Journal of Financial and Quantitative Analysis 41 (2):439-453.
Akamah, H., T. Omer, and S. Shu. 2016. Financial constraints, cash tax savings and tax
outcome variability: Working Paper, University of Nebraskas.
Allen, F., and R. Michaely. 2003. Payout Policy. 1 ed. Amsterdam: Elsevier.
Alli, K., A. Khan, and G. Ramirez. 1993. Determinants of corporate dividend policy: A
factorial analysis. The Financial Review 28 (4):523-547.
Altman, E. 1968. Financial ratios, discriminant analysis and the prediction of corporate
bankruptcy. The Journal of Finance 23 (4):589-609.
Anthony, J., and K. Ramesh. 1992. Association between accounting performance
measures and stock prices: A test of the life cycle hypothesis. Journal of
Accounting and Economics 15 (2):203-227.
Asquith, P., and D. Mullins Jr. 1983. The impact of initiating dividend payments on
shareholders' wealth. The Journal of Business 56 (1):77-96.
Baker, M., and J. Wurgler. 2004. A catering theory of dividends. The Journal of Finance
59 (3):1125-1165.
Benesh, G., A. Keown, and J. Pinkerton. 1984. An examination of market reaction to
substantial shifts in dividend policy. The Journal of Financial Research 7 (2):131-
142.
Bhattacharya, S. 1979. Imperfect information, dividend policy, and “the bird in the hand”
fallacy. The Bell Journal of Economics 10 (1):259-270.
Black, F., and M. Scholes. 1974. The effects of dividend yield and dividend policy on
common stock prices and returns. Journal of Financial Economics 1 (1):1-22.
Bradley, M., D. Capozza, and P. Seguin. 1998. Dividend policy and cash‐flow
uncertainty. Real Estate Economics 26 (4):555-580.
Brav, A., J. Graham, C. Harvey, and R. Michaely. 2005. Payout policy in the 21st
century. Journal of Financial Economics 77 (3):483-527.
Brown, J., K. Drake, and L. Wellman. 2015. The benefits of a relational approach to
corporate political activity: Evidence from political contributions to tax
policymakers. The Journal of the American Taxation Association 37 (1):69-102.
Brown, J., N. Liang, and S. Weisbenner. 2007. Executive financial incentives and payout
policy: Firm responses to the 2003 dividend tax cut. The Journal of Finance 62
(4):1935-1965.
Caballero, R., and E. Engel. 1999. Explaining investment dynamics in US manufacturing:
A generalized (S, s) approach. Econometrica 67 (4):783-826.
Campbell, J., J. Chyz, D. Dhaliwal, and W. Schwartz Jr. 2013. Did the 2003 tax act
increase capital investments by corporations. The Journal of the American
Taxation Association 35 (2):33-63.
Chen, S., X. Chen, Q. Cheng, and T. Shevlin. 2010. Are family firms more tax aggressive
than non-family firms? Journal of Financial Economics 95 (1):41-61.
65
Chetty, R., and E. Saez. 2005. Dividend taxes and corporate behavior: Evidence from the
2003 dividend tax cut. The Quarterly Journal of Economics 120 (3):791-833.
———. 2006. The effects of the 2003 dividend tax cut on corporate behavior:
Interpreting the evidence. The American Economic Review 96 (2):124-129.
Christie, W. 1994. Are dividend omissions truly the cruelest cut of all? Journal of
Financial and Quantitative Analysis 29 (3):459-480.
DeAngelo, H., and L. DeAngelo. 1990. Dividend policy and financial distress: An
empirical investigation of troubled NYSE firms. The Journal of Finance 45
(5):1415-1431.
DeAngelo, H., L. DeAngelo, and D. Skinner. 1992. Dividends and losses. The Journal of
Finance 47 (5):1837-1863.
Denis, D., and I. Osobov. 2008. Why do firms pay dividends? International evidence on
the determinants of dividend policy. Journal of Financial Economics 89 (1):62-
82.
Desai, M., and D. Dharmapala. 2006. Corporate tax avoidance and high-powered
incentives. Journal of Financial Economics 79 (1):145-179.
Dhaliwal, D., M. Erickson, and R. Trezevant. 1999. A test of the theory of tax clienteles
for dividend policies. National Tax Journal 52 (2):179-194.
Dhaliwal, D., C. Gleason, and L. Mills. 2004. Last‐chance earnings management: Using
the tax expense to meet analysts' forecasts. Contemporary Accounting Research
21 (2):431-459.
Dhaliwal, D., L. Krull, and O. Li. 2007. Did the 2003 tax act reduce the cost of equity
capital? Journal of Accounting and Economics 43 (1):121-150.
Dickinson, V. 2011. Cash flow patterns as a proxy for firm life cycle. The Accounting
Review 86 (6):1969-1994.
Drake, K., S. Lusch, and J. Stekelberg. 2017. Does tax risk affect investor valuation of
tax avoidance? Journal of Accounting, Auditing and Finance (forthcoming).
Dyreng, S., M. Hanlon, and E. Maydew. 2008. Long-run corporate tax avoidance. The
Accounting Review 83 (1):61-82.
Easterbrook, F. 1984. Two agency-cost explanations of dividends. The American
Economic Review 74 (4):650-659.
Edwards, A., C. Schwab, and T. Shevlin. 2016. Financial constraints and cash tax
savings. The Accounting Review 91 (3):859-881.
Eisen, B. 2016. Dividends are what matter now. The Wall Street Journal, August 24,
2016.
Elton, E., and M. Gruber. 1970. Marginal stockholder tax rates and the clientele effect.
The Review of Economics and Statistics 52 (1):68-74.
Fama, E., and K. French. 2001. Disappearing dividends: Changing firm characteristics or
lower propensity to pay? Journal of Financial Economics 60 (1):3-43.
Frank, M., L. Lynch, and S. Rego. 2009. Tax reporting aggressiveness and its relation to
aggressive financial reporting. The Accounting Review 84 (2):467-496.
Gonedes, N. 1978. Corporate signaling, external accounting, and capital market
equilibrium: Evidence on dividends, income, and extraordinary items. Journal of
Accounting Research 16 (1):26-79.
Graham, J., and A. Kumar. 2006. Do dividend clienteles exist? Evidence on dividend
preferences of retail investors. The Journal of Finance 61 (3):1305-1336.
66
Graham, J., and D. Rogers. 2002. Do firms hedge in response to tax incentives? The
Journal of Finance 57 (2):815-839.
Graham, J., and C. Smith. 1999. Tax incentives to hedge. The Journal of Finance 54
(6):2241-2262.
Grullon, G., R. Michaely, and B. Swaminathan. 2002. Are dividend changes a sign of
firm maturity? The Journal of Business 75 (3):387-424.
Guenther, D., S. Matsunaga, and B. Williams. 2017. Is tax avoidance related to firm risk?
The Accounting Review 92 (1):115-136.
Guenther, D., R. Wilson, and K. Wu. 2016. Tax uncertainty and marginal tax avoidance:
Working Paper, University of Oregon.
Gupta, S., and K. Newberry. 1997. Determinants of the variability in corporate effective
tax rates: Evidence from longitudinal data. Journal of Accounting and Public
Policy 16 (1):1-34.
Hainmueller, J., and Y. Xu. 2013. ebalance: A Stata package for entropy balancing.
Journal of Statistical Software 54 (7):1-18.
Hanlon, M., and S. Heitzman. 2010. A review of tax research. Journal of Accounting and
Economics 50 (2):127-178.
Healy, P., and K. Palepu. 1988. Earnings information conveyed by dividend initiations
and omissions. Journal of Financial Economics 21 (2):149-175.
Higgins, D., T. Omer, and J. Phillips. 2015. The influence of a firm's business strategy on
its tax aggressiveness. Contemporary Accounting Research 32 (2):674-702.
Inger, K. 2014. Relative valuation of alternative methods of tax avoidance. The Journal
of the American Taxation Association 36 (1):27-55.
Jensen, M. 1986. Agency cost of free cash flow, corporate finance, and takeovers. The
American Economic Review 76 (2):323-329.
John, K., and J. Williams. 1985. Dividends, dilution, and taxes: A signalling equilibrium.
The Journal of Finance 40 (4):1053-1070.
Kaplan, S., and L. Zingales. 1997. Do investment-cash flow sensitivities provide useful
measures of financing constraints? The Quarterly Journal of Economics 112
(1):169-215.
Koo, D., S. Ramalingegowda, and Y. Yu. 2016. The effect of financial reporting quality
on corporate dividend policy. Review of Accounting Studies (Forthcoming).
Krull, L. 2004. Permanently reinvested foreign earnings, taxes, and earnings
management. The Accounting Review 79 (3):745-767.
Lamont, O., C. Polk, and J. Saá-Requejo. 2001. Financial constraints and stock returns.
The Review of Financial Studies 14 (2):529-554.
Law, K., and L. Mills. 2015. Taxes and financial constraints: Evidence from linguistic
cues. Journal of Accounting Research 53 (4):777-819.
Leone, M. 2008. There’s a cash machine in your tax department. Retrieved September 7,
2016. Available from http://ww2.cfo.com/accounting-tax/2008/12/theres-a-cash-
machine-in-your-tax-department/.
Lintner, J. 1956. Distribution of incomes of corporations among dividends, retained
earnings, and taxes. The American Economic Review 46 (2):97-113.
Lipson, M., C. Maquieira, and W. Megginson. 1998. Dividend initiations and earnings
surprises. Financial Management 27 (3):36-45.
67
Lisowsky, P. 2010. Seeking shelter: Empirically modeling tax shelters using financial
statement information. The Accounting Review 85 (5):1693-1720.
Lisowsky, P., L. Robinson, and A. Schmidt. 2013. Do publicly disclosed tax reserves tell
us about privately disclosed tax shelter activity? Journal of Accounting Research
51 (3):583-629.
Litzenberger, R., and K. Ramaswamy. 1979. The effect of personal taxes and dividends
on capital asset prices: Theory and empirical evidence. Journal of Financial
Economics 7 (2):163-195.
McGuire, S., S. Neuman, and T. Omer. 2013. Sustainable tax strategies and earnings
persistence. Working Paper, Texas A&M University, The University of Missouri
at Columbia, and The University of Nebraska at Lincoln.
Michaely, R., R. Thaler, and K. Womack. 1995. Price reactions to dividend initiations
and omissions: Overreaction or drift? The Journal of Finance 50 (2):573-608.
Miller, M., and F. Modigliani. 1961. Dividend policy, growth, and the valuation of
shares. The Journal of Business 34 (4):411-433.
Miller, M., and K. Rock. 1985. Dividend policy under asymmetric information. The
Journal of Finance 40 (4):1031-1051.
Miller, M., and M. Scholes. 1978. Dividends and taxes. Journal of Financial Economics
6 (4):333-364.
Mills, L. 1998. Book-tax differences and Internal Revenue Service adjustments. Journal
of Accounting Research 36 (2):343-356.
Mueller, D. 1972. A life cycle theory of the firm. The Journal of Industrial Economics 20
(3):199-219.
Myers, S., and N. Majluf. 1984. Corporate financing and investment decisions when
firms have information that investors do not have. Journal of Financial
Economics 13 (2):187-221.
Nance, D., C. Smith, and C. Smithson. 1993. On the determinants of corporate hedging.
The Journal of Finance 48 (1):267-284.
Neuman, S. 2016. Tax strategies: It's not just about minimization. Working Paper, The
University of Missouri at Columbia.
Porter, M. E. 1980. Competitive strategy: techniques for analyzing industries and
competitors. New York, New York: The Free Press.
Rego, S. 2003. Tax‐Avoidance activities of US multinational corporations.
Contemporary Accounting Research 20 (4):805-833.
Saavedra, D. 2015. Tax spike firms. Working Paper, The University of California, Los
Angeles.
Sant, R., and A. Cowan. 1994. Do dividends signal earnings? The case of omitted
dividends. Journal of Banking & Finance 18 (6):1113-1133.
Skinner, D., and E. Soltes. 2011. What do dividends tell us about earnings quality?
Review of Accounting Studies 16 (1):1-28.
Smith, C., and R. Stulz. 1985. The determinants of firms' hedging policies. Journal of
Financial and Quantitative Analysis 20 (4):391-405.
Venkatesh, P. 1989. The impact of dividend initiation on the information content of
earnings announcements and returns volatility. The Journal of Business 62
(2):175-197.
68
Watts, R. 1973. The information content of dividends. The Journal of Business 46
(2):191-211.
———. 1976. Comments on "On the informational content of dividends". The Journal of
Business 49 (1):81-85.
Weisbach, D. 2002. Ten truths about tax shelters. Tax Law Review 55 (2):215-253.
Whited, T., and G. Wu. 2006. Financial constraints risk. The Review of Financial Studies
19 (2):531-559.
Wilson, R. 2009. An examination of corporate tax shelter participants. The Accounting
Review 84 (3):969-999.
69

The Relation Between Firm Divi

Uploaded by

Copyright:

Available Formats

You might also like

The Relation Between Firm Divi

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Relation Between Firm Divi

Uploaded by

Copyright:

Available Formats

THE RELATION BETWEEN FIRM DIVIDEND POLICY AND THE

PREDICTABILITY OF CASH EFFECTIVE TAX RATES

Matthew James Erickson

A Dissertation Submitted to the Faculty of the

In Partial Fulfillment of the Requirements

For the Degree of

In the Graduate College

THE UNIVERSITY OF ARIZONA

_______________________________________________________________________ Date: April 11, 2017

_______________________________________________________________________ Date: April 11, 2017

_______________________________________________________________________ Date: April 11, 2017

________________________________________________ Date: April 11, 2017

SIGNED: MATTHEW JAMES ERICKSON

I am deeply grateful to my dissertation committee members, Dan Dhaliwal

participants at The University of Arizona, Virginia Polytechnic Institute and State

Institute of Certified Public Accountants and specifically contributors to the Accounting

initiative. All errors are my own.

for your sacrifice. Specifically, I dedicate this dissertation as follows:

To my former teachers, for encouraging and nurturing curiosity.

To my brothers, for letting me explore the world with you.

me, and for never doubting me.

that the future is bright.

Thank You and I Love You All!

List of Figures and Tables .................................................................................................7

JEL Codes: G35; H25; M40; M41; M48

around dividend initiations and eliminations, and in a cross-sectional analysis of

financially constrained firms. Additionally, I validate my findings using a variety of

alternate econometric techniques, examining a subsample of firms initiating a dividend

payments. My findings are important to academics since they demonstrate a specific

prioritize predictable cash tax payments as a strategic objective. Likewise, I also

visible and qualitative change in corporate policy”.

also attempt to manage the predictability of their cash tax expense.

volatility of its cash ETR.

Further, I find consistent evidence that firms initiating (eliminating) a dividend

my first specification. Moreover, my tests demonstrate that firm-level financial constraint

prioritize obtaining immediate cash. While I specifically focus on dividend-paying firms,

Edwards, Schwab, and Shevlin 2016).

In additional analysis, I find that my results are robust to a variety of alternate

specifications designed to help address endogeneity concerns with respect to both

correlated, omitted variables and reverse causality. Specifically, I re-estimate my primary

share repurchases return capital to shareholders without imposing an expectation of

future cash flows.

and a lower likelihood of engaging in tax shelters (Wilson 2009).

My results contribute to the academic literature in several ways. In general, prior

dividend and thus demonstrate a previously overlooked consequence of dividend

sustainable tax strategy (Weisbach 2002; Neuman 2016).

managers to maintain less volatile cash tax payments.6

The remainder of my study proceeds as follows: in Section II, I provide

background information on the dividend literature with a specific focus on studies

state my hypotheses. Section IV contains a summary of my research design. In Section V,

I provide a summary of my primary results. In Section VI, I discuss the results of

additional analyses. Finally, in Section VII, I offer some concluding thoughts.

II. LITERATURE REVIEW

Relevance and Valuation of Dividends

firm value. Importantly, in my setting, it is unnecessary to identify the specific reason

recognize and act as though dividend policy does matter to investors.

manager’s ability to waste idle cash on value-decreasing investments (Jensen 1986);

(Easterbrook 1984). Additionally, dividends reduce information asymmetry between

importance of dividend policy to investors. Since different classes of investors face