The Big Short (Interest): Closing the Loopholes in the Dividend-Withholding Tax

We study the effect of stricter enforcement of the dividend-withholding tax (DWT). We focus on a 2016 Danish reform and compare Denmark to its Nordic neighbors. Firms in all countries exhibit strong spikes in stocks on loan around dividend dates. These spikes comprise several percent of the public float. The spikes are consistent with the most popular DWT arbitrage transactions. Post-reform, spikes in Denmark disappear. Stricter enforcement results in an approximately 130 percent increase in annual DWT revenue. Stricter enforcement does not negatively affect the investment climate as measured through Danish stock returns, investment and dividend yield. Studying other European reforms, we find that the 2016-reform in Germany was similarly able to eliminate spikes in security lending.