Dividend taxes and corporate choice: Evidence from 2015 tax cut in South Korea

In this paper, we test the old view and the new view of dividend taxation using a new set of evidence from a unique event in South Korea. Using a multiple regression discontinuity (MRD) setting from the South Korean 2015 tax reform, we find that investors react positively to the news of an anticipated dividend tax cut. The positive market reaction is more pronounced for firms with higher investment intensity, more investment opportunities, and less financial constraint. We also find that firms with more investment opportunities but less capital expenditures in the past are more likely to opt for the dividend tax cut. Using a difference-in-differences analysis, we document that corporate investment increases for firms that received the tax cut, along with a decrease in the implied cost of equity. Our findings are consistent with the notion that firms make a rational choice of dividend taxes based on their needs for financing and investment.