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New Evidence that Taxes Affect the Valuation of Dividends

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Author Info
James M. Poterba
Lawrence H. Summers

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Abstract

This paper uses British data to examine the effects of dividend taxes on investors' relative valuation of dividends and capital gains. British data offer great potential to illuminate the dividends and taxes question, since there have been two radical changes and several minor reforms in British dividend tax policy during the last twenty-five years. Studying the relationship between dividends and stockprice movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors' valuation of dividends. Using daily data on a small sample of firms, and monthly data on a much broader sample, we find clear evidence that taxes change equilibrium relationships between dividend yields and market returns. These findings suggest that taxes are important determinants of security market equilibrium, and deepen the puzzle of why firms pay dividends.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1288.

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Date of creation: Feb 1985
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Handle: RePEc:nbr:nberwo:1288

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Elton, Edwin & Gruber, Martin & Rentzler, Joel, 1983. "A simple examination of the empirical relationship between dividend yields and deviations from the CAPM," Journal of Banking & Finance, Elsevier, vol. 7(1), pages 135-146, March. [Downloadable!] (restricted)
  2. James M. Poterba & Lawrence H. Summers, 1985. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," Journal of Business, University of Chicago Press, vol. 34, pages 411. [Downloadable!]
  4. Elton, Edwin J & Gruber, Martin J, 1970. "Marginal Stockholder Tax Rates and the Clientele Effect," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 68-74, February. [Downloadable!] (restricted)
  5. Feldstein, Martin & Dicks-Mireaux, Louis & Poterba, James, 1983. "The effective tax rate and the pretax rate of return," Journal of Public Economics, Elsevier, vol. 21(2), pages 129-158, July. [Downloadable!] (restricted)
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  6. Hess, Patrick J, 1982. " The Ex-Dividend Day Behavior of Stock Returns: Further Evidence on Tax Effects," Journal of Finance, American Finance Association, vol. 37(2), pages 445-56, May. [Downloadable!] (restricted)
  7. Litzenberger, Robert H & Ramaswamy, Krishna, 1982. " The Effects of Dividends on Common Stock Prices: Tax Effects or Information Effects?," Journal of Finance, American Finance Association, vol. 37(2), pages 429-43, May. [Downloadable!] (restricted)
  8. Miller, Merton H. & Scholes, Myron S., 1978. "Dividends and taxes," Journal of Financial Economics, Elsevier, vol. 6(4), pages 333-364, December. [Downloadable!] (restricted)
  9. Feenberg, Daniel, 1981. "Does the investment interest limitation explain the existence of dividends?," Journal of Financial Economics, Elsevier, vol. 9(3), pages 265-269, September. [Downloadable!] (restricted)
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  10. Auerbach, Alan J., 1983. "Stockholder tax rates and firm attributes," Journal of Public Economics, Elsevier, vol. 21(2), pages 107-127, July. [Downloadable!] (restricted)
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  11. Lakonishok, Josef & Vermaelen, Theo, 1983. " Tax Reform and Ex-Dividend Day Behavior," Journal of Finance, American Finance Association, vol. 38(4), pages 1157-79, September. [Downloadable!] (restricted)
  12. Jerry R. Green, 1980. "Taxation and the Ex-Dividend Day Behavior of Common Stock Prices," NBER Working Papers 0496, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Hess, Patrick J, 1983. "Test for Tax Effects in the Pricing of Financial Assets," Journal of Business, University of Chicago Press, vol. 56(4), pages 537-54, October. [Downloadable!] (restricted)
  14. Litzenberger, Robert H & Ramaswamy, Krishna, 1980. " Dividends, Short Selling Restrictions, Tax-Induced Investor Clienteles and Market Equilibrium," Journal of Finance, American Finance Association, vol. 35(2), pages 469-82, May. [Downloadable!] (restricted)
  15. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May. [Downloadable!] (restricted)
  16. Hausman, Jerry A., 1983. "Specification and estimation of simultaneous equation models," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 7, pages 391-448 Elsevier. [Downloadable!] (restricted)
  17. Gordon, Roger H. & Bradford, David F., 1980. "Taxation and the stock market valuation of capital gains and dividends : Theory and emphirical results," Journal of Public Economics, Elsevier, vol. 14(2), pages 109-136, October. [Downloadable!] (restricted)
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  18. Litzenberger, Robert H. & Ramaswamy, Krishna, 1979. "The effect of personal taxes and dividends on capital asset prices : Theory and empirical evidence," Journal of Financial Economics, Elsevier, vol. 7(2), pages 163-195, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fumio Hayashi & Ravi Jagannathan, 1990. "Ex-day behavior of Japanese stock prices: new insights from new methodology," Discussion Paper / Institute for Empirical Macroeconomics 30, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  2. Ignacio Fonseca, 1997. "¿Actúan los dividendos como señal?: un contraste basado en los cambios de la fiscalidad en España (1985-1995)," Investigaciones Economicas, Fundación SEPI, vol. 21(1), pages 93-109, January. [Downloadable!]
  3. Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Trevor S. Harris & R. Glenn Hubbard & Deen Kemsley, 1999. "The Share Price Effects of Dividend Taxes and Tax Imputation Credits," NBER Working Papers 7445, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Pasi Sorjonen, 2002. "Ex-Dividend Day Stock Returns and Tick Rules," Discussion Papers 675, The Research Institute of the Finnish Economy. [Downloadable!]
  6. D. Beggs & C.L. Skeels, 2005. "Market Arbitrage of Cash Dividends and Franking Credits," Department of Economics - Working Papers Series 947, The University of Melbourne. [Downloadable!]
    Other versions:
  7. Clemens Sialm, 2006. "Investment Taxes and Equity Returns," NBER Working Papers 12146, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Dino Falaschetti & Michael Orlando, 2003. "Cutting the Dividends Tax…and Corporate Governance Too?," Finance 0311008, EconWPA. [Downloadable!]
  9. Ellen R. McGrattan & Edward C. Prescott, 2004. "Taxes, Regulations, and the Value of U.S. and U.K. Corporations," Levine's Bibliography 122247000000000715, UCLA Department of Economics. [Downloadable!]
    Other versions:
  10. Morck, Randall, 2006. "How to Eliminate Pyramidal Business Groups: The Double Taxation of Inter-corporate Dividends and other Incisive Uses of Tax Policy," CEI Working Paper Series 2005-15, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
    Other versions:
  11. Randall Morck, 2003. "Why Some Double Taxation Might Make Sense: The Special Case of Inter-corporate Dividends," NBER Working Papers 9651, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Seth Armitage, 2004. "Returns after personal tax on UK equity and gilts, 1919-1998," European Journal of Finance, Taylor and Francis Journals, vol. 10(1), pages 23-43, February. [Downloadable!] (restricted)
  13. Mara Faccio & Larry H. P. Lang & Leslie Young, 2001. "Dividends and Expropriation," American Economic Review, American Economic Association, vol. 91(1), pages 54-78, March. [Downloadable!] (restricted)
  14. Daunfeldt, Sven-Olov & Selander, Carina & Wikström, Magnus, 2006. "Taxation, Dividend Payments and Ex-Day Price Changes," UmeÃ¥ Economic Studies 684, Umeå University, Department of Economics. [Downloadable!]
  15. Pasi Sorjonen, 2002. "Ex-Dividend Day Stock Price Behavior, Taxes and Discrete Prices; A Simulation Experiment," Discussion Papers 676, The Research Institute of the Finnish Economy. [Downloadable!]
  16. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2002. "Dividend Policy inside the Firm," NBER Working Papers 8698, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Pasi Sorjonen, 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. [Downloadable!]
  18. William M. Gentry & Deen Kemsley & Christopher J. Mayer, 2001. "Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts," NBER Working Papers 8486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  19. Bell, Leonie & Jenkinson, Tim, 2001. "New Evidence of the Impact of Dividend Taxation and on the Identity of the Marginal Investor," CEPR Discussion Papers 2946, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  20. Daunfeldt, Sven-Olov, 2005. "Tax-Induced Trading and the Identity of the Marginal Investor: Evidence from Sweden," HUI Working Papers 3, The Swedish Retail Institute (HUI). [Downloadable!]
    Other versions:
  21. Shaun K. Roache & Alexander P. Attie, 2009. "Inflation Hedging for Long-Term Investors," IMF Working Papers 09/90, International Monetary Fund. [Downloadable!]
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