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 prices on high-dividend versus low-dividend paying stocks. We do not find any imprint of the dividend tax cut news on the value of the aggregate U.S. 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 did induce asset reallocation within equity portfolios. Finally, the positive abnormal returns on non-dividend paying U.S. stocks in 2003 do not appear to be tied to tax-cut news.
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- 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.
- 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.
- James Poterba, 2004.
"Taxation and Corporate Payout Policy,"
NBER Working Papers
10321, 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.
- Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc.
- 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.
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