Imputation tax system, dividend payout, and investor behavior: Evidence from the Taiwan stock exchange

This paper examines the change in corporate dividend policy and investor behavior in relation to the introduction of the imputation tax system in Taiwan. However, the findings of this study are unlike those of previous studies. Stock dividends are treated as a dividend for taxation purposes and represented the dominant payment mechanism in Taiwan before 1997. By contrast, both the number of firms paying cash dividends and aggregate cash dividend payments increase after the introduction of the imputation tax system. Consistent with the tax preference for the distribution of dividends, a higher level of tax deductible rate was associated with a higher cash dividend payout ratio. Domestic individual investors have been the only shareholders affected by the introduced dividend imputation, whereas the percentage of firms owned by domestic individual investors has decreased. However, the percentage of firms owned by foreign institutional investors has increased.