Global Effects of U.S. Dividend Income Tax

Do non-U.S. firms respond to the U.S. dividend income tax? To explore this question, we examine the 2003 dividend tax cut which only applies to certain non-U.S. firms depending on both tax treaties and corresponding foreign withholding taxes. We find that 1) foreign firms from which U.S. investors enjoy the full tax cut become more likely to initiate or increase their dividends; 2) such changes are stronger across those foreign firms that are bigger, index-included and with higher credit rating; and 3) these firms also respond consistently to the expiry of the tax cut.