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The Share Price Effects of Dividend Taxes and Tax Imputation Credits

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  • Trevor S. Harris
  • R. Glenn Hubbard
  • Deen Kemsley

Abstract

We examine the hypothesis that dividend taxes are capitalized into share prices by focusing on investors' implicit valuations of retained earnings versus paid-in equity. Retained earnings are distributable as taxable dividends, whereas paid-in equity is distributable as a tax-free return of capital. Consistent with dividend tax capitalization, firm-level results for the United States indicate that accumulated retained earnings are valued less per unit than contributed capital. In addition, differences in dividend tax rates across U.S. tax regimes are associated with predictable differences in the magnitude of the implied tax discount for retained earnings, as are differences in dividend tax rates across Australia, Japan, France, Germany, and the United Kingdom.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7445.

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Date of creation: Dec 1999
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Publication status: published as Harris, Trevor S., R. Glenn Hubbard and Deen Kemsley. "The Share Price Effects Of Dividend Taxes And Tax Imputation Credits," Journal of Public Economics, 2001, v79(3,Mar), 569-596.
Handle: RePEc:nbr:nberwo:7445

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Cited by:
  1. Guenther, David A. & Sansing, Richard, 2006. "Fundamentals of shareholder tax capitalization," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 371-383, December.
  2. Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc.
  3. Todd Sinai & Joseph Gyourko, . "The Asset Price Incidence of Capital Gains Taxes: Evidence from the Taxpayer Relief Act of 1997 and Publicly-Traded Real Estate Firms," Zell/Lurie Center Working Papers 311, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  4. Hanlon, Michelle & Myers, James N. & Shevlin, Terry, 2003. "Dividend taxes and firm valuation:: a re-examination," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 119-153, June.
  5. 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.
  6. Gravelle, Jane G., 2003. "Effects of Dividend Relief on Economic Growth, the Stock Market, and Corporate Tax Preferences," National Tax Journal, National Tax Association, vol. 56(3), pages 653-72, September.

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