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How Did the 2003 Dividend Tax Cut Affect Stock Prices?

  • Gene Amromin
  • Paul Harrison
  • Steven Sharpe

"We test the hypothesis that the 2003 dividend tax cut boosted US stock prices and thereby lowered the cost of equity capital. Using an event-study methodology, we attempt to identify an aggregate stock market effect by comparing the behavior of US common stock prices with that of foreign equities and the equities of real estate investment trusts (REITs). We also examine the relative cross-sectional response of prices of high- and low-dividend-paying stocks. We do not find any imprint of the dividend tax cut news on the value of the aggregate US stock market. On the other hand, high-dividend stocks outperformed low-dividend stocks by a few percentage points over the event windows, suggesting that the tax cut may have induced asset reallocation within equity portfolios. Finally, the positive abnormal return on nondividend paying US stocks in 2003 does not appear to be tied to tax cut news." Copyright (c) 2008 Financial Management Association International..

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1755-053X.2008.00028.x
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Article provided by Financial Management Association International in its journal Financial Management.

Volume (Year): 37 (2008)
Issue (Month): 4 (December)
Pages: 625-646

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Handle: RePEc:bla:finmgt:v:37:y:2008:i:4:p:625-646
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  1. James Poterba, 2004. "Taxation and Corporate Payout Policy," NBER Working Papers 10321, National Bureau of Economic Research, Inc.
  2. Alan J. Auerbach & Kevin A. Hassett, 2000. "On the Marginal Source of Investment Funds," NBER Working Papers 7821, National Bureau of Economic Research, Inc.
  3. Alan J. Auerbach & Kevin A. Hassett, 2006. "Dividend Taxes and Firm Valuation: New Evidence," American Economic Review, American Economic Association, vol. 96(2), pages 119-123, May.
  4. Auerbach, Alan J., 2002. "Taxation and corporate financial policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 19, pages 1251-1292 Elsevier.
  5. John R. Graham & Roni Michaely & Michael R. Roberts, 2003. "Do Price Discreteness and Transactions Costs Affect Stock Returns? Comparing Ex-Dividend Pricing before and after Decimalization," Journal of Finance, American Finance Association, vol. 58(6), pages 2611-2636, December.
  6. Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc.
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