The Tax Consequences of Share Repurchases and Other Non-Dividend Cash Payments to Equity Owners

Abstract

You know something is happening, but you don't know what it is, do you Mr. Jones. "Ballad of a Thin Man," Bob Dylan The financial behavior of corporations has changed greatly in the last ten years. Previously, most of the cash that stockholders received from corporations took the form of dividends, and the dividend cash flow was the ultimate determinant of the value of equities. Recently, as this paper will document, dividends have been surpassed by nondividend cash distributions to shareholders. These distributions are the sum of share repurchases and cash mergers. In 1985, more than half of the money received by shareholders from corporations was for the acquisition of shares. The growth of nondividend cash payments to shareholders has major consequences for our understanding of share valuation and investment as well as for revenue projections of the U.S. Treasury. In particular, the fact that the financial behavior of companies has changed so significantly (and without much recognition) calls into question the forecasts that the new tax law will increase corporate tax collections by $120 billion. To pre