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

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  • Jenkinson, Tim
  • Bell, Leonie

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.

Suggested Citation

  • Jenkinson, Tim & Bell, Leonie, 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.
  • Handle: RePEc:cpr:ceprdp:2946
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    More about this item

    Keywords

    Dividend taxation; Equity valuation;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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