Taxes, Payout Policy, and Share Prices: Evidence from DID Analysis Using Korea's 2015-2017 Dividend Tax Cut

The Korean government temporarily lowered dividend tax rates for investors of firms that significantly increased dividend payments in 2015-2017. This study begins by examining whether qualifying firms on average increased dividends after controlling for other factors of dividends and how additional dividend payouts were financed. Unsurprisingly, we find that qualifying firms for the dividend tax cut increased dividends substantially without incurring a substitution effect between dividends and share repurchases. The main question of this study, which is the effect of the dividend tax cut on share prices, is investigated using the difference-in-differences analysis in the propensity score matched sample. We find that that the dividend tax cut increased the value of firms that took advantage of the tax cut by 22%, which is consistent with agency theory and the prevailing Korean discount in the financial market.