Dividend and Taxes, Redux, ... Again

In this paper we study the effect of The Job Growth and Taxpayer Relief Reconciliation Act of 2003 on dividend payouts of two types of firms. Using a sample of traditional (predisposed to paying dividends) and growth-oriented (paying dividends only to satisfy stockholders' demands) firms, we show that dividend payouts increased before the tax law changed and continued to rise, thereafter. In addition, the differences across the two types of firms disappeared, most likely because to increases in firm size. Thus, although the reduced tax rate on personal dividend income might have been a reason for the increase, there must have been other factors in play, too. We also conclude that the dividend decision not just varies, but that it also matters.