Does tax really matter for corporate payout policy: Evidence from a policy experiment in South Korea

To promote corporate dividends, in 2014, the Korean government introduced a temporary tax reform that lowered the personal income tax burden on dividends from “high-dividend firms” that meet certain requirements as defined under the tax code. This study applies this unique tax reform as a natural experiment to examine whether dividend tax cuts are effective in increasing corporate dividends. This tax cut applied to listed (but not unlisted) firms. Taking advantage of this fact, we employed the difference-in-difference matching estimator for our analysis. Our results show that the reform has little effect on increasing corporate payout, as well as the number of firms paying dividends. This finding is consistent with previous studies that provided supporting evidence for the new view proposed by Auerbach (1979), Bradford (1981), and King (1977). Moreover, we show that firms' profitability and ownership structure are key factors that enable firms to satisfy the qualifying requirements for high-dividend firms. •In 2014, the Korean government introduced a tax reform that provided a temporary dividend tax cut.•The tax cut is applied only to “high-dividend firms” that meet certain requirements as defined under the tax code.•Considering the unique reform as a naturalexperiment, weinvestigate the impacts of the tax cut on firms’ dividend policy.•By applying the DID-ME, we find that the 2014 tax reform has little effect on corporate payoutpolicy.•We also find that firms’ profitability and ownership structure are key factors that make firms be high-dividend firms.