The effect of investor-level tax reform on payout policies : evidence from companies listed in selected sectors on the Johannesburg Stock Exchange

Thesis (PhD)--Stellenbosch University, 2021.ENGLISH SUMMARY : Tax reform in a country offers an opportunity to investigate the effect of taxes on payout policies in support of the tax and tax clienteles theory as an explanation for paying dividends. Tax reform in South Africa since 2011 contains the amendment of the definition of dividend, the introduction of dividends tax, and consecutive increases in tax rates. The extensive nature of the tax reform, including an amendment relating to the share repurchases by companies listed on the Johannesburg Stock Exchange, offers a unique setting for conducting empirical research in South Africa. The research question of this study was whether the payout policies of selected companies listed on the Johannesburg Stock Exchange were adjusted on the basis of investor-level tax reform. An empirical research design, which was quantitative in nature, was pursued to provide descriptive and explanatory evidence in order to answer the research question. The four research objectives of this study focused on the after-tax values of payout methods, the timing of dividend declarations, the trend and composition of total payout, and the relationship between investor tax preference parameters and payout methods. This study is submitted as the first study of its kind to be conducted in a South African context, and in particular, from the perspective of a developing country and emerging market. For selected listed companies (excluding secondary listings on Johannesburg Stock Exchange as well as companies in the resources and financial sectors) the financial reporting periods from 2006 to 2019 were considered. The central year of interest in this study was 2012 when dividends tax was introduced in South Africa on 1 April 2012. An overview of tax reform and the after-tax values of payout methods enunciated the increased role of taxes as a result of the conflicting tax preferences of investors (individuals, corporates, and institutions) for different payout methods (dividends, capital distributions, additional shares, and share repurchases). Eight propositions in respect of a tax effect on payout policies were also informed by the overview of tax reform and after-tax values. Support for these propositions was considered based on the results of research objectives as evidence of whether payout policies were adjusted on the basis of investor-level tax reform. The timing of interim dividends declared during 2012 was found to have been postponed and supported by a tax explanation which suggested that payout policies were adjusted in a year of investor-level tax reform. The trend and composition of total payout during the post-2012 period were also found to have differed from the pre-2012 period in support of propositions based on tax reform and after-tax values. Ordinary dividends were increasingly used as a payout method during the post-2012 period with a decrease in the use of payout methods other than ordinary dividends. The increase in the value and frequency of electing scrip dividends (additional shares with a cash alternative) during the post-2012 period suggests an adjustment of payout policies which confers more flexibility to investors to manage their financial interests, including tax considerations. The relationship between changes in payout methods, profitability, and three categories of investor tax preference parameters (individuals, corporates, and institutions) since 2012 was also investigated by means of regression analyses. Regression results found changes in the investor tax preferences of corporates as the most statistically significant of all three categories of investors considered in explaining changes in dividends. This finding supports a proposition based on a dividends tax exemption afforded to corporates and consecutive increases in the effective rate at which capital gains of corporates are taxed. Furthermore, regression results revealed the presence of a top individual investor in companies to be associated with lower payout methods other than dividends. This finding supports the rent extraction hypothesis which posits that top shareholders could prefer to extract private benefits of control rather than payout that equally benefit all shareholders. The finding further extended to include directors based on the fact that directors represent top individual shareholders by an overwhelming majority. This study contributes to corporate finance literature by providing empirical evidence that suggests that the payout policies of selected companies were adjusted on the basis of investor-level tax reform. An effect of investor-level tax reform on payout policies is submitted on the basis of the fact that payout policies were adjusted. Evidence from South Africa as a developing country and emerging market further contributes to literature on dividend policy practices in emerging markets. The data collected, the data collection method, and limitations of this study could serve as a basis for future research into the effect of taxes on payout policies.AFRIKAANSE OPSOMMING : Geen opsomming beskikbaar.Doctora