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Dividend tax capitalization and liquidity

Author

Listed:
  • Stephanie A. Sikes

    (University of Pennsylvania)

  • Robert E. Verrecchia

    (University of Pennsylvania)

Abstract

We provide a new explanation for cross-sectional variation in dividend tax capitalization. Our analysis is twofold. First, we conduct a theoretical analysis that shows that liquidity (illiquidity) mitigates (magnifies) the positive effect of dividend taxes on expected rates of return documented in prior literature. Second, we conduct an empirical analysis centered around the Jobs and Growth Tax Relief and Reconciliation Act of 2003, which reduced the difference between the maximum statutory dividend and capital gains tax rates, and find results consistent with our theory. We also provide results suggesting that institutional ownership’s mitigating effect on dividend tax capitalization documented in prior studies is attributable to stocks with greater institutional ownership being more liquid and not to the “marginal investor” being insensitive to dividend taxes.

Suggested Citation

  • Stephanie A. Sikes & Robert E. Verrecchia, 2015. "Dividend tax capitalization and liquidity," Review of Accounting Studies, Springer, vol. 20(4), pages 1334-1372, December.
    • Handle: RePEc:spr:reaccs:v:20:y:2015:i:4:d:10.1007_s11142-015-9323-1
    DOI: 10.1007/s11142-015-9323-1
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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