Volatility of Tax Payments and Dividend Payouts

Dividends are a key mechanism for shareholders to discipline managers and mitigate agency conflicts. This study examines whether the volatility of tax payments is associated with dividend payouts. Consistent with the predictions, results suggest that firms with more volatile tax payments are less likely to pay dividends overall and their dividends are lower in magnitude when doing so. These effects are economically significant and incremental to a firm’s operating risk. The link between volatile tax payments and the likelihood of dividend payouts is weaker for firms that distribute dividends to alleviate agency conflicts. Similarly, the link between volatile tax payments and the amount of dividend payouts is weaker for firms that hold more cash for tax reasons. Taken together, these findings add to our understanding of the economic consequences of volatile tax payments and the determinants of dividend payouts.