Abstract

This study investigates the impact of tax avoidance on dividend policy in listed non-financial firms in Portugal, Italy, Greece, and Spain from 2018 to 2024. Using Refinitiv Eikon panel data for 368 firms—yielding approximately 2200 firm-year observations before lagging—and firm fixed-effects models, the study examines whether tax avoidance increases dividend payouts and whether board independence, financial constraints, and economic policy uncertainty condition this relationship. Tax avoidance is measured using reverse-coded effective tax rate proxies and book–tax differences, while dividend policy is proxied by the dividend payout ratio. The results reveal a positive association between tax avoidance and dividend payout, suggesting that tax planning can operate as a channel for generating additional distributable liquidity in classical double-tax systems. However, this pass-through is not mechanical. The effect of tax avoidance on dividends is weaker in firms with more independent boards and stronger among financially constrained firms. It is also attenuated under heightened policy uncertainty. These findings support a three-dimensional conditionality model in which tax avoidance creates the capacity for higher dividends, but governance quality, financing frictions, and macro-level risk jointly determine whether tax-generated liquidity is paid out, retained, or used for dividend smoothing.

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