Repatriation tax and dividend policy

• Published date: 01 January 2024
• Author: Shaddy Douidar,Ninon Sutton
• Date: 01 January 2024
• DOI: http://doi.org/10.1002/jcaf.22645

Received: 22 November 2022 Revised: 28 May 2023 Accepted: 4 June 2023

DOI: 10.1002/jcaf.22645

RESEARCH ARTICLE

Repatriation tax and dividend policy

Shaddy Douidar Ninon Sutton

Kate Tiedemann School of Business and

Finance, Muma College of Business,

University of South Florida, Tampa,

Florida, USA

Correspondence

Shaddy Douidar, Kate Tiedemann School

of Business and Finance, Muma College

of Business, University of South Florida,

4202 E Fowler Ave.,Tampa, FL 33620,

USA.

Email: sdouidar@usf.edu

Abstract

This paper examines the impact of the repatriation tax provision of the Tax

Cuts and Jobs Act (TCJA) on firms’ dividend policy. Our findings show that the

firms most affected by the repatriation tax provision, that is, those with high for-

eign sales, reward shareholders by substantially increasing dividends per share,

but maintain aggregate dollar dividends. Dividend per share (DPS) increas-

ing firms repurchase at significantly higher magnitudes than non-dividend per

share increasing firms, suggesting that DPS increasing firms partially utilize

repurchases to avoid substantial increases in their long-term aggregate dividend

commitments. We also investigate whether managers reap the rewards of divi-

dend increases, finding that firms with high levels of executive ownership and

foreign sales are more likely to increase their dividends per share after the TCJA

was enforced. Overall, our results highlight the importance of the intercon-

nection between dividends and repurchases in examining the response of firm

payout policy to external shocks.

KEYWORDS

dividends, payout policy, repatriation, repurchases

JEL CLASSIFICATION

G30, G35

1 INTRODUCTION

The Tax Cuts and Jobs Act of 2017 (TCJA) is widely con-

sidered to be the most significant tax reform in decades,

with important implications for U.S. corporations, specif-

ically those U.S. multinational corporations with signif-

icant amounts of foreign earnings held overseas. The

TCJA included a repatriation tax provision, which pro-

vided strong incentives to U.S. firms to transfer past and

future foreign earnings held abroad in foreign subsidiaries.

Previous papers have investigated the repatriation tax pro-

vision’s impact on corporate payout policy, showing that

firms with high foreign income sharply increased their

repurchase activity in 2018 (Beyer et al., 2021; Kalcheva

et al., 2020; etc.). These papers also examine how the repa-

triation tax provision affected the dividend payout ratios

of US firms, concluding that US firms did not significantly

change their dividend payout ratios in 2018.1However,

what is missing in these prior studies is an examination

of the interaction between repurchases and dividends. Do

most firms use their repatriated earnings to repurchase

shares, as previous papers suggest, or do they adjust their

whole payout policy, including both repurchasesand divi-

dends? Our study attempts to more carefully identify how

the repatriation tax cut of the TCJA influences payout pol-

icy by examining the interrelationship between the two

types of payouts, dividends and repurchases, in response

to this external shock.

When analyzing the dividend payout ratio after the tax

cut, it is essential to consider the impact that the large

amounts of repurchases in 2018 had on the dividend pay-

out ratio. Firms that increased dividends per share in 2018

38 © 2023 Wiley Periodicals LLC. J Corp Account Finance. 2024;35:38–58.wileyonlinelibrary.com/journal/jcaf

DOUIDAR and SUTTON 39

may not explicitly show an increase in total dividends paid

out (Dividends per share * Shares Outstanding) due to the

decrease in shares outstanding as a result of share buy-

backs. Mechanically, corporate aggregate dividends will

decrease if a firm repurchases in substantial amounts, due

to the decrease in outstanding shares. Examining changes

in aggregate dividends can hint at whether there is an

increase in dividends per share, but the magnitude of

shareholders’ rewards, if existent, remains unclear until

directly examining the levels of dividends per share. Fur-

thermore, the repatriation tax provision resulted in a large

cash influx in 2018 for US firms with high accumulated

foreign income. Typically, the denominator of the divi-

dend payout ratio, total assets, decreases (via cash spent)

when buying back shares. However,the large influx of cash

from the transfer of foreign income would offset the cash

spent on repurchases, thus mitigating, or even completely

counteracting, the decrease in assets resulting from the

repurchase. These considerations imply that examining

the dividend payout ratio can lead to a misleading conclu-

sion that firms did not change their dividends per share

levels. In short, firms may increase their dividends per

share, but the increase may be unobserved due tothe varia-

tion in the other two variables in the dividend payout ratio

(assets and shares outstanding). Floyd et al. (2015) similarly

note that changes in dividends per share are more transpar-

ent than other dividend measures, which are affected by

other factors such as share repurchases and issues. There-

fore, to properly examine the impact of the TCJA on firm

dividend policy and to investigate whether firm’s share-

holders are rewarded with higher dividend payouts after

the TCJA was passed, we examine changes in dividends

per share for firms most impacted by the repatriation tax

provision.

We also examine whether the decision to increase divi-

dends per share after the TCJA is magnified for firms that

have high levels of executive stock ownership. Prior litera-

ture has shown that a firm’sdividend policy can be strongly

impacted by insider ownership. For example, Blouin et al.

(2004)andBrownetal.(2007) find that dividend increases

are positively related to insider stock ownership, as exec-

utives have an incentive to increase firms’ dividends per

share levels as a means to maximize their compensation.

Furthermore, Chetty and Saez (2005) find firms with high

levels of executive ownership were most likely to increase

dividends after the Bush administration passed the Jobs

and Growth Tax Relief Reconciliation Act of 2003, which

resulted in a large tax cut on individual dividend income.

In addition, under-diversified executives may use dividend

payments for liquidity purposes due to possible contrac-

tual restrictions on their ability to sell shares of stock (Core

& Guay, 1999), further encouraging executives to increase

dividends per share.

Our findings show that firms benefitting from the

repatriation tax provision are significantly more likely to

increase their dividends per share by at least 10% in 2018.

Specifically, we find that firms with high foreign sales are

significantly more likely to increase their dividends per

share in 2018, but do not increase their total dividends or

dividend payout ratios.2

To better understand why firms with high foreign

sales increase their dividends per share levels, but do

not increase their dividend payout ratios, we investigate

whether dividends per share increasing firms also repur-

chase at higher magnitudes. Previous work has shown that

firms avoid substantial increases in their long-term com-

mitment of ‘sticky’ dividend payouts (Guay & Harford,

2000) in response to tax policy changes that can be tem-

porary (e.g., Hanlon & Hoopes, 2014). However, firms that

increase their dividends per share can utilize repurchases

to mitigate their long-term dividend commitments and

avoid substantial increases (Grullon & Michaely, 2002).

By decreasing the number of shares outstanding (through

repurchases), firms that increase dividends per share can

reward their shareholders, while avoiding increases in

their long-term dividend obligations. Building off this

logic, we find evidence that firms that increase their

dividends per share also repurchase their shares at signif-

icantly higher magnitudes than firms that do not increase

dividends per share levels. In examining the role of insider

ownership in payout policy, our tests show that US firms

with both high levels of foreign sales and executive own-

ership are more likely to increase their dividends per

share post-TCJA,consistent with prior literature that firms

with high levels of executive ownership have heightened

motivation to increase dividends.

This study makes three contributions to the literature.

First, we answer unresolved questions on the true effect

of the TCJA on firms’ dividend payout policy. Previous

papers find that the primary use of repatriated earnings

was to repurchase shares, with little to no effect on divi-

dends. However, our analysis revealsa significant increase

in dividends per share after the passage of the TCJA for

firms most affected by the repatriation tax provision. More

importantly, we find evidence that dividend per share

increasing firms that benefit from the repatriation tax

provision repurchase at significantly higher magnitudes,

suggesting that firms partially utilize repurchases as

substitutes for long-term dividend obligations (Grullon &

Michaely, 2002). In other words, firms that increase their

dividends per share following the TCJA tend to buy back

their shares at a higher rate. Thus, in examining payout

policy as a whole, our study highlights that dividend

and repurchase decisions are interconnected in ways

that are not always transparent. Last, this study provides

evidence that high executive ownership further enhances