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The Relationship between Before- and After-Tax Yields on Financial Assets

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  • Bey, Roger P
  • Collins, J Markham

Abstract

In this research, the traditional approximation that after-tax yiel ds equal before-tax yields times one minus the tax rate is shown, in general, to be incorrect. The traditional relationship holds only for one-year assets and perpetuities when a single tax rate applies to both ordinary income and capital gains. For all other multiperiod assets, the correct relationship is much more complex and is a function of the statutory tax rates on ordinary income and capital gains, the holding period, the dividend growth rate for common stocks, and any premium or discount on bonds. The direction of bond-p ice changes is related inversely to the direction of the tax-rate changes, but the direction of common stock price changes is related ambiguously to the direction of tax-rate changes. Copyright 1988 by MIT Press.

Suggested Citation

  • Bey, Roger P & Collins, J Markham, 1988. "The Relationship between Before- and After-Tax Yields on Financial Assets," The Financial Review, Eastern Finance Association, vol. 23(3), pages 313-331, August.
    • Handle: RePEc:bla:finrev:v:23:y:1988:i:3:p:313-31
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    Cited by:

    1. Robert A. Taggart, Jr., 1989. "Consistent Valuation and Cost of Capital Expressions with Corporate and Personal TAxes," NBER Working Papers 3074, National Bureau of Economic Research, Inc.

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