Tax Policy and Corporate Investment Valuation: International Evidence

This study offers a novel contribution to the literature on taxation and corporate finance by integrating the insights of Jacob and Jacob (2013) and Bonaimé et al. (2014) to examine the impact of the dividend tax penalty (taxation of dividends relative to capital gains) on investor valuation of corporate investments. While Jacob and Jacob (2013) establish that higher dividend taxes incentivize stock repurchases, and Bonaimé et al. (2014) demonstrate that a higher ratio of stock repurchases to total payout increases financial flexibility due to the greater flexibility of stock repurchases compared to dividends, this study bridges these findings to demonstrate how tax-induced shifts in payout policy differentially affect investor perceptions of capital expenditure and R&D. The findings reveal that tax policies favoring stock repurchases do not influence the former but positively correlate with the latter. This suggests that tax policies favoring stock repurchases may foster innovation by increasing financial flexibility for R&D investment, leading to higher valuations from investors. This study clarifies the link between taxes and the value of corporate investments, showing that the impact is significant.