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Dividend Yields and Stock Returns: A Test for Tax Effects

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  • Patrick J. Hess

Abstract

This paper examines the empirical relation between stock returns and dividend yields. Several equilibrium pricing models incorporating differential taxation of dividends and capital gains are nested as systems of time series regressions. Estimates of these models and tests of parameter restrictions implied by the models are conducted within the context of Zellner's seemingly unrelated regression. It is concluded that the data fail to support these models as well as the hypothesis that dividends are neutral. The inability to distinguish between these competing hypotheses suggests the need for further research before definitive conclusions are reached regarding the tax impacts of dividends.

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  • Patrick J. Hess, 1981. "Dividend Yields and Stock Returns: A Test for Tax Effects," NBER Working Papers 0649, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0649
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    References listed on IDEAS

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    1. Elton, Edwin J & Gruber, Martin J, 1970. "Marginal Stockholder Tax Rates and the Clientele Effect," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 68-74, February.
    2. Constantinides, George M, 1983. "Capital Market Equilibrium with Personal Tax," Econometrica, Econometric Society, vol. 51(3), pages 611-636, May.
    3. Laitinen, Kenneth, 1978. "Why is demand homogeneity so often rejected?," Economics Letters, Elsevier, vol. 1(3), pages 187-191.
    4. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
    5. Black, Fischer & Scholes, Myron, 1974. "The effects of dividend yield and dividend policy on common stock prices and returns," Journal of Financial Economics, Elsevier, vol. 1(1), pages 1-22, May.
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