Does dividend tax impede competition for corporate charters? |
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| Institution: | 1. IÉSEG School of Management (LEM-CNRS 9221), France;2. The Chinese University of Hong Kong, Hong Kong;1. Division of Maternal-Fetal Medicine, Department of Obstetrics and Gynecology, University of Mississippi Medical Center, Jackson, USA;2. Department of Obstetrics and Gynecology, University of Mississippi Medical Center, Jackson, USA;1. ICREA Research Professor, Universitat Pompeu Fabra, Barcelona IPEG, Barcelona GSE, Spain; New Economic School, Russia;2. Professor of Economics and Political Science, and Gorter Family Professor of Islamic Studies, Duke University, USA;3. Research Scholar, Stanford Center for International Development, Stanford Institute for Economic Policy Research, Stanford University, USA;1. Department of Economics, Wesleyan University, Middletown CT 06457 USA;2. Wesleyan University USA;1. Division of Critical Care Medicine and Trauma, National Hospital Organization Disaster Medical Center, 3256 Midori, Tachikawa, Tokyo 190-0014, Japan;2. Emergency Medical Center, Kagawa University Hospital, 1750-1 Ikenobe, Miki, Kita, Kagawa 761-0793, Japan;3. Clinical research support center, Kagawa University Hospital, 1750-1 Ikenobe, Miki, Kita, Kagawa 761-0793, Japan |
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| Abstract: | We develop a model of jurisdictional competition for corporate charters among the states in which a firm’s agency cost depends on the federal dividend income tax rate and the takeover regulations of its domicile state. When firms are mobile across states, the federal dividend income tax rate affects both the intensity of competition among the states and the equilibrium level of state takeover regulations. Our model shows that increasing dividend tax rate weakens the competition for corporate charters under a condition: dividend-paying and the market for corporate control are complementary corporate governance mechanisms. This condition holds empirically, suggesting that dividend tax not only discourages firms from paying dividends but also weakens their corporate governance by disincentivizing states to improve their corporate laws. |
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