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The relative valuation of dividends and capital gains in Finland

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  • Pasi Sorjonen

    (Pellervo Economic Research Institute)

Abstract

This study examines the relative valuation of dividends and capital gains in the Finnish stock market in 1960-1985. Stock prices fell on ex-dividend days by less than Ihe amount of dividend implying that investors faced lower marginal tax rates on capital gains than on dividend income. It is, however, the total tox liability of the company and the shareholder together that should be used to infer market preference for dividends or capital gains. Using the estimation results of our ex-dividend analysis and estimates of corporate tax rates on retained and distributed profit we find that investors have shifted from capital gains preference to dividend preference. The reason for this outcome is the tax advantage of distributed profit in corporate taxation which has outweighted the tax disadvantage of dividend income in personal taxation.

Suggested Citation

  • Pasi Sorjonen, 1988. "The relative valuation of dividends and capital gains in Finland," Finnish Economic Papers, Finnish Economic Association, vol. 1(1), pages 105-117, Spring.
    • Handle: RePEc:fep:journl:v:1:y:1988:i:1:p:105-117
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    Cited by:

    1. Sorjonen, Pasi, . "Essays on Dividends and Taxes," ETLA A, The Research Institute of the Finnish Economy, number 30.
    2. Sorjonen, Pasi, 2002. "Ex-Dividend Day Stock Price Behavior, Taxes and Discrete Prices; A Simulation Experiment," Discussion Papers 676, The Research Institute of the Finnish Economy.
    3. Sorjonen, Pasi, 2002. "Ex-Dividend Day Behavior of Stock Prices in Finland in 1989-90 and 1993-97," Discussion Papers 674, The Research Institute of the Finnish Economy.

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