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New Evidence of the Impact of Dividend Taxation and on the Identity of the Marginal Investor

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  • Bell, L.
  • Jenkinson, T.

Abstract

This paper examines the impact of a major change in dividend taxation introduced in the UK in July 1997. The reform was structured in such a way that the immediate impact fell almost entirely on the largest investor class in the UK, namely pension funds. We analyse the behaviour of share prices around the ex-dividend day both before and after the reform to test clientele effects and the impact of taxation on the valuation of companies. We find strong clientele effects in the UK, which are consistent with the distortions introduced by the tax system (before the reform dividend income was tax-advantaged in the UK). We also find significant changes in the valuation of dividend income after the reform, in particular for high-yielding companies. These results provide strong support for the hypothesis that taxation affects the valuation of companies, and that pension funds were the effective marginal investors for high-yielding companies.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 9924.

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Length: 35 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:oxf:wpaper:9924

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Keywords: TAXATION ; DIVIDENDS ; PRICES ; BEHAVIOUR;

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References

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  1. Philip Brown & Alex Clarke, 1993. "The Ex-Dividend Day Behaviour of Australian Share Prices Before and After Dividend Imputation," Australian Journal of Management, Australian School of Business, vol. 18(1), pages 1-40, June.
  2. Kalay, Avner, 1982. " The Ex-Dividend Pay Behavior of Stock Prices: A Re-Examination of the Clientele Effect," Journal of Finance, American Finance Association, vol. 37(4), pages 1059-70, September.
  3. Green, Richard C. & Rydqvist, Kristian, 1999. "Ex-day behavior with dividend preference and limitations to short-term arbitrage: the case of Swedish lottery bonds," Journal of Financial Economics, Elsevier, vol. 53(2), pages 145-187, August.
  4. Michaely, Roni & Murgia, Maurizio, 1995. "The Effect of Tax Heterogeneity on Prices and Volume around the Ex-dividend Day: Evidence from the Milan Stock Exchange," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 369-99.
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  6. 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.
  7. James M. Poterba & Lawrence A. Summers, 1984. "New Evidence that Taxes Affect the Valuation of Dividends," Working papers 338, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. 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.
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  10. Murray Frank & Ravi Jagannathan, 1997. "Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes," Staff Report 229, Federal Reserve Bank of Minneapolis.
  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. 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.
  13. Eades, Kenneth M. & Hess, Patrick J. & Kim, E. Han, 1984. "On interpreting security returns during the ex-dividend period," Journal of Financial Economics, Elsevier, vol. 13(1), pages 3-34, March.
  14. 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.
  15. Boyd, John H & Jagannathan, Ravi, 1994. "Ex-dividend Price Behavior of Common Stocks," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 711-41.
  16. Lamdin, Douglas J & Hiemstra, Craig, 1993. "Ex-dividend Day Share Price Behavior: Effects of the Tax Reform Act of 1986," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 778-83, November.
  17. Kaplanis, Costas P, 1986. " Options, Taxes, and Ex-Dividend Day Behavior," Journal of Finance, American Finance Association, vol. 41(2), pages 411-24, June.
  18. Michaely, Roni, 1991. " Ex-dividend Day Stock Price Behavior: The Case of the 1986 Tax Reform Act," Journal of Finance, American Finance Association, vol. 46(3), pages 845-59, July.
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  20. Zodrow, George R., 1991. "On the 'Traditional' and 'New' Views of Dividend Taxation," National Tax Journal, National Tax Association, vol. 44(4), pages 497-509, December.
  21. 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.
  22. Ang, James S & Blackwell, David W & Megginson, William L, 1991. " The Effect of Taxes on the Relative Valuation of Dividends and Capital Gains: Evidence from Dual-Class British Investment Trusts," Journal of Finance, American Finance Association, vol. 46(1), pages 383-99, March.
  23. Donald B. Keim, . "Dividend Yields and Stock Returns: Implications of Abnormal January Returns," Rodney L. White Center for Financial Research Working Papers 14-85, Wharton School Rodney L. White Center for Financial Research.
  24. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  25. Lasfer, M Ameziane, 1995. " Ex-day Behavior: Tax or Short-Term Trading Effects," Journal of Finance, American Finance Association, vol. 50(3), pages 875-97, July.
  26. 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.
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