Dividend policy and the 1986 Tax Reform Act
Abstract
This study examines the impact of the 1986 Tax Reform Act (TRA) passage on firm dividend policy. Estimating variations of Rozeff's (1982) dividend payout model enables examination of the impact of the 1986 TRA with respect to industry affiliation, size within industry, beta stability, and a proxy for investment. Additionally the study calculates dividend payout ratios using two methods, one using cash flows and one using earnings per share.
The results of the earnings per share models indicate that firms altered dividend payout after the 1986 TRA passage. Industry affiliation, size within industry, and beta stability all impacted dividend policy response in varying degrees.
The results of the cash flow models indicate that industry affiliation is the major determinant of firm dividend policy response to the 1986 TRA passage. Size within industry plays a minor role in determining dividend policy response to the 1986 TRA in two of the twenty-four industries. The proxy for investment is significant in both cash flow and earnings per share models.