Higher Dividend Taxes, No Problem! Evidence from Taxing Entrepreneurs in France by Charles Boissel, Adrien Matray (2/2019).
This paper investigates how the large increase in dividend tax rate in France in 2013 affected firms’ performance and corporate investment. Using administrative data covering the universe of firms for the period 2008–2016 and a quasiexperimental setting, we find that firms swiftly cut dividend payments. Firms use this tax-induced increase in liquidity to invest more, particularly so when facing high demand. For every additional euro of undistributed dividends, firms increase their investment by 0.2 euro, leading to higher sales growth. Heterogeneity analysis fails to find any group of firms having to cut their investment, thereby clearly rejecting models in which dividend tax reforms affect the cost of capital. Overall, our results suggest that entrepreneurs are credit constraints in equilibrium, despite paying dividends and do not hold enough liquidity to seize investment opportunities when they arise randomly in the economy.
