For three years, from 2015 to 2017, the Korean government granted temporary tax benefits to shareholders of firms that exceeded certain thresholds to qualify as high-dividend firms. Using the temporary tax cut as an exogenous tax shock imposed on the market, I examine the impact of the temporary tax cut on high-dividend firms’ changes in dividend policy and firm performance, focusing on ownership by majority shareholders. I find that when majority shareholders, who have the greatest influence on dividend decision-making, have a high levels of ownership, such firms are likely to be high-dividend firms. This result suggests that the majority shareholders exert influence on dividend policy to pursue their private interests. I also reveal that the dividends increased with majority shareholders’ level of ownership in high-dividend firms, while tax-advantaged stock repurchases decreased, suggesting that such substitutions may have increased the tax burden on minority investors’ distributions. Finally, I find that the majority shareholders’ level of ownership in high-dividend firms had a significantly negative effect on the firms’ short- and long-term performance, while minority shareholders’ level of ownership had a significantly positive impact on the firms’ short- and long-term firm performance, suggesting that the tax reforms led to agency problems.

JEL classification: G35, G32, G34

Key words: corporate dividends policy, the dividends tax reform, majority shareholder, agency problems​​