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The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study

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  • Alan J. Auerbach
  • Kevin A. Hassett

Abstract

The "Jobs and Growth Tax Relief Act of 2003" (JGTRA03) contained a number of significant tax provisions, but the most noteworthy may have been the reduction in dividend tax rates. The political debate over the dividend tax reductions of 2003 took a number of surprising twists and turns. Accordingly, it is likely that the views of market participants concerning the probability of significant dividend tax reduction fluctuated significantly during 2003. In this paper, we use this fact to estimate the effects of dividend tax policy on firm value. We find that firms with higher dividend yields benefited more than other dividend paying firms, a result that, in itself, is consistent with both new and traditional views of dividend taxation. But further evidence points toward the new view and away from the traditional view. We also find that non-dividend-paying firms experienced larger abnormal returns than other firms as the result of the dividend tax cut, and that a similar bonus accrued to firms likely to issue new shares, two results that may appear surprising at first but are consistent with the theory developed in the paper.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11449.

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Date of creation: Jul 2005
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Handle: RePEc:nbr:nberwo:11449

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  1. James Poterba, 2004. "Taxation and Corporate Payout Policy," American Economic Review, American Economic Association, vol. 94(2), pages 171-175, May.
  2. Mandelker, Gershon, 1974. "Risk and return: The case of merging firms," Journal of Financial Economics, Elsevier, vol. 1(4), pages 303-335, December.
  3. Alan J. Auerbach, 2001. "Taxation and Corporate Financial Policy," NBER Working Papers 8203, National Bureau of Economic Research, Inc.
  4. Jaffe, Jeffrey F, 1974. "Special Information and Insider Trading," The Journal of Business, University of Chicago Press, vol. 47(3), pages 410-28, July.
  5. Salinger, Michael, 1992. "Standard Errors in Event Studies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 39-53, March.
  6. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  7. Sinn, Hans-Werner, 1991. "The vanishing harberger triangle," Journal of Public Economics, Elsevier, vol. 45(3), pages 271-300, August.
  8. Alan J. Auerbach & Kevin A. Hassett & Stephen D. Oliner, 1993. "Reassessing the Social Returns to Equipment Investment," NBER Working Papers 4405, National Bureau of Economic Research, Inc.
  9. Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
  10. Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
  11. James M. Poterba & Lawrence H. Summers, 1985. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
  12. Carroll, Robert & Hassett, Kevin A. & Mackie, James B. III, 2003. "The Effect of Dividend Tax Relief on Investment Incentives," National Tax Journal, National Tax Association, vol. 56(3), pages 629-51, September.
  13. Christopher L. House & Matthew D. Shapiro, 2008. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," American Economic Review, American Economic Association, vol. 98(3), pages 737-68, June.
  14. Kevin A. Hassett & Alan J. Auerbach, 2009. "On the Marginal Source of Investment Funds," Working Papers 25533, American Enterprise Institute.
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Cited by:
  1. Seppo Kari & Hanna Karikallio & Jukka Pirttilä, 2008. "Anticipating Tax Changes: Evidence from the Finnish Corporate Income Tax Reform of 2005," Discussion Papers 447, Government Institute for Economic Research Finland (VATT).
  2. Steven Davis & R Jason Faberman & John Haltiwanger & Ron Jarmin & Javier Miranda, 2008. "Business Volatility, Job Destruction, and Unemployment," Working Papers 08-26, Center for Economic Studies, U.S. Census Bureau.
  3. Tobias Lindhe & Jan Södersten, 2009. "Dividend Taxation, Share Repurchases and the Equity Trap," CESifo Working Paper Series 2652, CESifo Group Munich.
  4. Alan J. Auerbach & Michael P. Devereux & Helen Simpson, 2008. "Taxing Corporate Income," NBER Working Papers 14494, National Bureau of Economic Research, Inc.
  5. Jennifer Blouin & Jana Raedy & Douglas Shackelford, 2010. "Dividends, Share Repurchases, and Tax Clienteles: Evidence from the 2003 Reductions in Shareholder Taxes," NBER Working Papers 16129, National Bureau of Economic Research, Inc.
  6. Clemens Sialm, 2009. "Tax Changes and Asset Pricing," American Economic Review, American Economic Association, vol. 99(4), pages 1356-83, September.
  7. Lindhe, Tobias & Södersten, Jan, 2013. "Distortive Effects of Dividend Taxation," Working Paper Series 2013:16, Uppsala University, Department of Economics.

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