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How Did the 2003 Dividend Tax Cut Affect Stock Prices?

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  • Gene Amromin
  • Paul Harrison
  • Steven Sharpe

Abstract

"We test the hypothesis that the 2003 dividend tax cut boosted US stock prices and thereby lowered the cost of equity capital. Using an event-study methodology, we attempt to identify an aggregate stock market effect by comparing the behavior of US common stock prices with that of foreign equities and the equities of real estate investment trusts (REITs). We also examine the relative cross-sectional response of prices of high- and low-dividend-paying stocks. We do not find any imprint of the dividend tax cut news on the value of the aggregate US stock market. On the other hand, high-dividend stocks outperformed low-dividend stocks by a few percentage points over the event windows, suggesting that the tax cut may have induced asset reallocation within equity portfolios. Finally, the positive abnormal return on nondividend paying US stocks in 2003 does not appear to be tied to tax cut news." Copyright (c) 2008 Financial Management Association International..

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Bibliographic Info

Article provided by Financial Management Association International in its journal Financial Management.

Volume (Year): 37 (2008)
Issue (Month): 4 (December)
Pages: 625-646

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Handle: RePEc:bla:finmgt:v:37:y:2008:i:4:p:625-646

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References

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  1. Auerbach, Alan J. & Hassett, Kevin A., 2006. "Dividend Taxes and Firm Valuation: New Evidence," Berkeley Olin Program in Law & Economics, Working Paper Series qt2nt4k6vj, Berkeley Olin Program in Law & Economics.
  2. James Poterba, 2004. "Taxation and Corporate Payout Policy," NBER Working Papers 10321, National Bureau of Economic Research, Inc.
  3. John R. Graham & Roni Michaely & Michael R. Roberts, 2003. "Do Price Discreteness and Transactions Costs Affect Stock Returns? Comparing Ex-Dividend Pricing before and after Decimalization," Journal of Finance, American Finance Association, vol. 58(6), pages 2611-2636, December.
  4. Alan J. Auerbach & Kevin A. Hassett, 2000. "On the Marginal Source of Investment Funds," NBER Working Papers 7821, National Bureau of Economic Research, Inc.
  5. Alan J. Auerbach, 2001. "Taxation and Corporate Financial Policy," NBER Working Papers 8203, National Bureau of Economic Research, Inc.
  6. Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc.
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Cited by:
  1. Jeffrey R. Brown & Nellie Liang & Scott Weisbenner, 2006. "Executive financial incentives and payout policy: firm responses to the 2003 dividend tax cut," Finance and Economics Discussion Series 2006-14, Board of Governors of the Federal Reserve System (U.S.).
  2. Jesse Edgerton, 2010. "Effects of the 2003 dividend tax cut: evidence from real estate investment trusts," Finance and Economics Discussion Series 2010-34, Board of Governors of the Federal Reserve System (U.S.).
  3. Clemens Sialm, 2006. "Investment Taxes and Equity Returns," NBER Working Papers 12146, National Bureau of Economic Research, Inc.
  4. Alan J. Auerbach & Kevin A. Hassett, 2006. "Dividend Taxes and Firm Valuation: New Evidence," American Economic Review, American Economic Association, vol. 96(2), pages 119-123, May.
  5. Josef García Blandón & M?nica Martínez Blasco & Josef Argiles Bosch, 2011. "Ex-Dividend Day Returns when Dividend and Capital Gains are Taxed at the Same Rate," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(2), pages 140-152, June.

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