Instituto de Economía

Abstract: The paper analyzes the efficiency costs of dividend taxation in a quiet-life corporate agency model. Unlike existing models, the quiet-life model is able to predict negative corporate investment responses for mature firms that are consistent with empirical analyses. We further show that investment changes following a rise in dividend taxes might not be sufficient to infer, first, the efficiency cost of dividend taxation and, second, the financing regime of the firm that underlies the investment response, in contrast to insights from previous literature. We provide a testable implication to infer the mode of investment finance from investment responses. Finally, we relate the results to recent empirical findings in the literature on dividend taxation.