Interest on Equity Versus Dividends: The role of Shareholder Identity on Corporate Tax Avoidance

Purpose – This paper investigates whether the identity of controlling shareholder is a determinant to distribution earnings (IOE vis-à-vis regular dividends) in sample Brazilian public companies. Theoretical framework Through numerical exemplifications, we show that cost receiving cash payouts through Interest on Equity (IOE) significantly heterogeneous across shareholders. We use this diversity state optimal (from tax standpoint) for each type shareholder. Design/methodology/approach test hypotheses using an unbalanced panel 404 firms over 12-year period. Our estimations Probit and Tobit data regressions. Due endogeneity concerns ownership status, also run regressions lagged regressors, Heckman two-step selection model, matched samples. Findings Consistent with ex-ante, tax-driven hypotheses, find presence institutional investors increases form IOE dividends, reducing overall taxation (firm-level plus investor level) average firm. Smarter management dividend policy positive function firm-characteristics such as size better corporate governance standards. Overall, our evidence suggests shareholders’ influences payout channel. Research Practical & Social implications Although literature discusses several possible explanations limited payments Brazil, provide many may not enjoy benefits precisely because law discourages shareholders from it. Such critical policymakers since there current, controversial national debate imposing extinguishing (Projeto de Lei nº 2.337, 2021), “segunda fase da Reforma Tributária”. Originality/value Unlike previous studies, discuss perspective beneficiaries (shareholders) payers (investees) rather than latter or former alone. Furthermoe, reflection potential measurement problems, create variable measures ratio distributed maximum allowed by (IOE_IOE*), which permits more precise benefit obtained Keywords Shareholder Identity, Payout Policy, Tax Management, Corporate Governance, Equity.