Passing the Shareholders’ Tax Burden to the Corporation : Evidence from Inheritance and Gift Tax

Using the inheritance and gift events of controlling shareholders, we find that firms increase their dividend payouts to cater to the controlling shareholders’ cash needs. Moreover, the increase in dividend payouts is larger when the controlling shareholders’ total tax burden from the event is higher, supporting that controlling shareholders’ cash needs is a main driver of the change in firms’ dividend policy. In our cross-sectional tests, we find that controlling shareholders are more likely to induce firms to increase dividends when it is easier to expropriate, and that strong corporate governance deters these tax-induced dividends. We also find economic consequences associated with increased dividend payouts. Specifically, the increase in dividend payouts leads to a reduction in corporate investment and negative dividend announcement returns. Together, our results show that controlling shareholders may pass their tax burdens onto corporations at the expense of firm value