Study On The Effect Of Dividend Tax On Chinese Listed Companies’ Cash Dividend Policy

Dividend policy is a core element of modern corporate financial policies. In most countries, individual investors have to pay dividend tax, while stock capital gains tax exemption.Therefore, relative to the capital gains, dividends will bring a "tax penalty" to shareholders. Whether this "penalty" would make shareholders demand higher stock yields? And as a consequence, will it affect the company’s dividend policy? These questions have caused a lively academic discussion abroad, but there have been no consensus. Until right now, China has not yet levied a tax on stock capital gains. This paper will research about whether the difference between dividend tax and capital gains tax would make the tax effect exists in Chinese listed company dividend policy.June 2005, individual investors’ dividend tax rate from 20% down to 10%. In 2008, the "new CIT Law" almost eliminating the dividend tax on corporate investors. After 2013, China began to levy dividend tax according to the individual investors’ shareholding time. This paper is based on the “tax difference theory” and selects listed companies which paid cash dividends in 2001-2014 as samples while the three dividend tax reforms mentioned above as background. Paper adds B/M ratio factor and size factor on the Lizenberger and Ramaswamy’s after-tax CAPM model, forming a multi-factors after-tax CAPM model for empirical research. By analyzing whether the dividend tax impacts on cash dividend payment willingness and cash dividend payment amount, this paper examines the effect of dividend tax on Chinese listed companies’ cash dividend policy. Result shows that dividend tax will not make an influence in the listed companies choose to pay or not to pay cash dividends. It means that the dividend tax won’t affect the listed companies’ willingness to pay cash dividends. However, if the listed companies choose to pay cash dividends, dividend tax will induce companies to reduce the amount of cash dividend. It shows that “dividend tax penalty" existing in China. Cash dividend reduces the shareholders’ real income, so they demand higher capital gains to cover. This phenomenon makes investors tend to stock capital gains rather than dividends, resulting in low cash dividend policy of listed companies. Regression results also found that the dividend tax reforms in 2005 and 2013 play a role in encouraging the listed company to pay more cash dividends. According to research findings, the paper argues that the methods of further dividend tax relief, some tax incentives to the behavior of cash dividend reinvestment and levy a tax on stock capital gains can reduce the difference between cash dividend and stock capital gains, encourage listed companies to cash dividends.