Raj Chetty: recommendation

Transcript context

…Or do nothing. Or do nothing, thereby avoiding the dividend tax and just paying the capital gains tax. In practice, companies pay dividends. There have been explanations put forth, which I think are plausible. For instance, you need to constrain managers — the amount of capital managers have on hand — because otherwise there’s a tendency to empire-build and invest in projects that aren’t as efficient from the shareholder’s perspective as you might otherwise like. And dividends, for some reason, are viewed as a commitment. If I’m going to start paying a dividend, I’m going to keep paying that dividend. If I choose to cut it back, it’s usually a negative, very negative, signal that a firm is sending. And so that forces managers to pay out money, which could be efficient from a shareholder’s point of view, if you think managers don’t have the right incentives. But that’s maybe why the real puzzle is not dividends per se, but the mix of dividends and managers who raise funds at the same time. It seems you’re pulling in with one hand, taking out with the other, and paying in that price in the net cash position. It would seem to be some kind of arbitrage loss because you’re paying more tax than you need to.…

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