Payout policy,taxes, and the relation between returns and the bid–ask spread |
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| Institution: | 1. College of Management, Yuan Ze University, 135 Yuan-Tung Road, Taoyuan, Taiwan\n;2. College of Management and Innovation Center for Big Data and Digital Convergence, Yuan Ze University, 135 Yuan-Tung Road, Taoyuan, Taiwan\n;1. Danmarks Nationalbank, Havnegade 5, DK-1093 Copenhagen K, Denmark;2. Department of Economics, University of Copenhagen, Øster Farimagsgade 5, DK-1353 Copenhagen K, Denmark;3. Goldman Sachs International, 133 Fleet Street, Peterborough Court, EC4A 2BB UK |
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| Abstract: | Recent evidence demonstrates that corporate payout policy has shifted from the nearly exclusive use of dividend payout to the inclusion of stock repurchase, primarily through open markets. This trend has been attributed to the tax advantages associated with repurchase relative to dividends. In this paper, we introduce personal taxation and stock repurchase to reexamine the relation between returns and the bid–ask spread. Our model provides insight into the nature of this relation. Tests performed using NYSE, AMEX, and NASDAQ data provide empirical support of our theoretical conclusions. We conclude that the firm’s choice of payout policy influences the relation between returns and spreads. |
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