The results of recent empirical res

The results of recent empirical research in this area are not entirely consistent. Chetty and Emmanuel (2005) analyze the impact of the 2003 dividend tax cut in the United States on firms’ payout behavior and find that, consistent with the ‘traditional view’, the tax cut induced companies to increase their dividend payments and created the possibility for an


initial dividend payout. The same result is also found in Dhaliwal and Oliver (2007), Brown et al. (2007), and Blouin et al. (2004). Surveying 384 financial executives and conducting in-depth interviews, Brav et al. (2005) find that dividend tax is not a dominant concern for the majority of firms and, with respect to the 2003 dividend tax cut, only 28% of finan-cial managers felt that it might increase their company’s dividend payout, while the other 70% of financial managers believed the decline in dividend tax might not or would not af-fect their dividend policy. In addition, La Porta et al. (2000) analyze the effects of dividend taxes around the world, but do not find any conclusive results.

Different theories have completely different views on the reform of dividend taxation policies. Recently, many countries have begun to focus on dividend tax reforms. A number of developed countries, including the United States, Britain and Germany, have adjusted their dividend tax rates. However, what is confusing is that the direction of the changes in dividend taxation has been different. Some countries, such as Britain and Germany, have increased their dividend tax rates, while others, such as the United States, have reduced their dividend tax rates. In the United States, the Jobs and Growth Tax Relief Reconciliation Act was enacted in 2003 by President Bush. One of the main provisions of the act was to reduce the tax on individual dividend income to 15%, instead of the top rate of 35%. How-ever, the reforms in the United Kingdom and Germany were different. From 1973, share-holders in the United Kingdom were credited for a portion of the taxes they paid at the corporate level, through what is known as an imputation-style corporate tax system. How-ever, in 1997, the amount deductible was reduced from 20% to 10%, thereby effectively increasing shareholders’ dividend tax rates. This reform brought the UK tax system more into line with classical taxation. Similarly, Germany’s nearly 30 year old imputation-style corporate tax system, which was one of the lightest dividend tax systems in the world, was abolished in 2000, which also led to an increased dividend tax rate.

Therefore, whether declines in dividend tax rates lead firms to increase their dividend payments, which then eases the conflict of interest between large and small shareholders, is an important empirical question. However, little large sample empirical research has been conducted on this important issue in China. In a previous study based on a unique sample of 86 listed companies releasing A and B shares, Zhang (2007) finds that, consistent with the ‘traditional view’, China’s dividend tax cut affected the price of equity capital. Be-cause the dividend tax rate is higher than the capital income tax rate in China, investors expect a higher return from companies that make high dividend payments. Although Zhang’s (2007) research design is ingenious, the study has some deficiencies. Leaving aside the small sample size, there is a systematic difference between the A-share and B-share markets. In a study of the short-term market reaction to the dividend tax cut, Zeng and Zhang (2005) find that cumulative abnormal returns are positively correlated with divi-dend payments. They argue that, in China, dividend tax affects asset prices in line with the ‘traditional view’. However, not all investors were beneficiaries of the dividend tax cut. For example, corporate shares were not subject to the reduced dividend tax rate. Zeng and Zhang (2005) fail to acknowledge this difference. This paper focuses on the causal relationship between the dividend tax cut and increased dividend payments, and evalu-ates the effects of China’s dividend taxation reform.

To examine this causal relationship and evaluate the reform of dividend taxation, this paper uses a sample of A-share listed companies between 2003 and 2007 for the empirical tests. In addition, a ‘natural experiment’ and difference-in-difference estimator methods are used to estimate the impact of the dividend tax cut on companies’ dividend policies.


We find that the 2005 dividend tax cut led firms to increase their dividend payments. Companies with higher proportions of tradable individual shares or investment fund shares were more likely to increase their dividend payments. However, opportunistic behavior was also detected, where companies with higher proportions of shares held by executives were more likely to increase their dividend payments. These findings support the existence of a causal relationship between dividend tax cuts and increased dividend payments and suggest that China’s reform of dividend taxation in 2005 achieved its goal.

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The results of recent empirical research in this area are not entirely consistent. Chetty and Emmanuel (2005) analyze the impact of the 2003 dividend tax cut in the United States on firms’ payout behavior and find that, consistent with the ‘traditional view’, the tax cut induced companies to increase their dividend payments and created the possibility for an initial dividend payout. The same result is also found in Dhaliwal and Oliver (2007), Brown et al. (2007), and Blouin et al. (2004). Surveying 384 financial executives and conducting in-depth interviews, Brav et al. (2005) find that dividend tax is not a dominant concern for the majority of firms and, with respect to the 2003 dividend tax cut, only 28% of finan-cial managers felt that it might increase their company’s dividend payout, while the other 70% of financial managers believed the decline in dividend tax might not or would not af-fect their dividend policy. In addition, La Porta et al. (2000) analyze the effects of dividend taxes around the world, but do not find any conclusive results.Teori yang berbeda memiliki pandangan yang sama sekali berbeda pada reformasi kebijakan perpajakan dividen. Baru-baru ini, banyak negara telah mulai untuk fokus pada reformasi pajak dividen. Sejumlah negara-negara berkembang, termasuk Amerika Serikat, Inggris dan Jerman, telah disesuaikan tarif pajak dividen mereka. Namun, apa yang membingungkan adalah bahwa arah perubahan pajak dividen telah berbeda. Beberapa negara, seperti Britania Raya dan Jerman telah meningkat tarif pajak dividen mereka, sementara orang lain, seperti Amerika Serikat, telah mengurangi tarif pajak dividen mereka. Di Amerika Serikat, pekerjaan dan pertumbuhan pajak Relief rekonsiliasi Act diundangkan pada 2003 oleh Presiden Bush. Salah satu utama ketentuan undang-undang adalah untuk mengurangi pajak pada pendapatan dividen perorangan untuk 15%, bukan tingkat atas 35%. Bagaimana-pernah, reformasi di Inggris dan Jerman yang berbeda. Dari tahun 1973, pemegang saham di Inggris yang dikreditkan untuk sebagian dari pajak mereka dibayar pada tingkat perusahaan, melalui apa yang dikenal sebagai sistem pajak perusahaan tuduhan bergaya. Bagaimana-pernah, pada tahun 1997, jumlah dikurangkan diturunkan dari 20% sampai 10%, dengan demikian berkesan meningkatkan tarif pajak dividen pemegang saham. Reformasi ini membawa sistem pajak Inggris lebih ke garis dengan klasik perpajakan. Demikian pula, Jerman hampir 30 tahun tuduhan bergaya pajak perusahaan sistem, yang merupakan salah satu sistem pajak dividen ringan di dunia, dihapuskan pada tahun 2000, yang juga menyebabkan tingkat pajak dividen meningkat.Therefore, whether declines in dividend tax rates lead firms to increase their dividend payments, which then eases the conflict of interest between large and small shareholders, is an important empirical question. However, little large sample empirical research has been conducted on this important issue in China. In a previous study based on a unique sample of 86 listed companies releasing A and B shares, Zhang (2007) finds that, consistent with the ‘traditional view’, China’s dividend tax cut affected the price of equity capital. Be-cause the dividend tax rate is higher than the capital income tax rate in China, investors expect a higher return from companies that make high dividend payments. Although Zhang’s (2007) research design is ingenious, the study has some deficiencies. Leaving aside the small sample size, there is a systematic difference between the A-share and B-share markets. In a study of the short-term market reaction to the dividend tax cut, Zeng and Zhang (2005) find that cumulative abnormal returns are positively correlated with divi-dend payments. They argue that, in China, dividend tax affects asset prices in line with the ‘traditional view’. However, not all investors were beneficiaries of the dividend tax cut. For example, corporate shares were not subject to the reduced dividend tax rate. Zeng and Zhang (2005) fail to acknowledge this difference. This paper focuses on the causal relationship between the dividend tax cut and increased dividend payments, and evalu-ates the effects of China’s dividend taxation reform.To examine this causal relationship and evaluate the reform of dividend taxation, this paper uses a sample of A-share listed companies between 2003 and 2007 for the empirical tests. In addition, a ‘natural experiment’ and difference-in-difference estimator methods are used to estimate the impact of the dividend tax cut on companies’ dividend policies. We find that the 2005 dividend tax cut led firms to increase their dividend payments. Companies with higher proportions of tradable individual shares or investment fund shares were more likely to increase their dividend payments. However, opportunistic behavior was also detected, where companies with higher proportions of shares held by executives were more likely to increase their dividend payments. These findings support the existence of a causal relationship between dividend tax cuts and increased dividend payments and suggest that China’s reform of dividend taxation in 2005 achieved its goal.