How did the 2003 dividend tax cut affect stock prices?
We test the hypothesis that the 2003 dividend tax cut boosted U.S. stock prices and thus lowered the cost of equity. Using an event-study methodology, we attempt to identify an aggregate stock market effect by comparing the behavior of U.S. common stock prices to that of European stocks and real estate investment trusts. We also examine the relative cross-sectional response of stock prices for high-dividend and low-dividend stocks. We find that U.S. large-cap and small-cap indexes do not outperform their European counterparts, nor REIT stocks, over the event windows, suggesting the absence of a notable aggregate stock market effect. Second, high-dividend-yield stocks outperformed low-dividend-yield stocks by a few percentage points over the event windows, consistent with the hypothesis that investors heavily discounted future dividends, though this outperformance appears to dissipate in subsequent weeks. Finally, non-dividend paying stocks are found to have outperformed the overall market by a small margin, but this result does not appear to be tied to tax-cut news, suggesting that non-tax factors were at play.
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- Alan J. Auerbach & Kevin A. Hassett, 2006.
"Dividend Taxes and Firm Valuation: New Evidence,"
NBER Working Papers
11959, National Bureau of Economic Research, Inc.
- Auerbach, Alan J. & Hassett, Kevin A., 2006. "Dividend Taxes and Firm Valuation: New Evidence," Berkeley Olin Program in Law & Economics, Working Paper Series qt2nt4k6vj, Berkeley Olin Program in Law & Economics.
- 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.
- Auerbach, Alan J. & Hassett, Kevin A., 2003.
"On the marginal source of investment funds,"
Journal of Public Economics,
Elsevier, vol. 87(1), pages 205-232, January.
- James Poterba, 2004.
"Taxation and Corporate Payout Policy,"
American Economic Review,
American Economic Association, vol. 94(2), pages 171-175, May.
- Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc.
- Alan J. Auerbach, 2001.
"Taxation and Corporate Financial Policy,"
NBER Working Papers
8203, National Bureau of Economic Research, Inc.
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