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Stock Repurchases As The Earnings Management: An Unintended Consequence Of The 2003 Dividend Tax Cut, Xiang Gao
Stock Repurchases As The Earnings Management: An Unintended Consequence Of The 2003 Dividend Tax Cut, Xiang Gao
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I examine the impact of the 2003 dividend tax cut (Jobs and Growth Tax Relief Reconciliation Act, JGTRRA) on firms using stock repurchases for earnings per share (EPS) manipulation. Prior to 2003, dividends were taxed at the individual's income tax rate, which usually was ranged from 28 percent to 50 percent, compared to 20 percent tax rate on capital gains. In May 2003, with the passage of the JGTRRA, the dividend tax was cut significantly to 15 percent for the majority of individual income tax brackets, which is equal to the tax rate of capital gain. Consistent with Blouin et …