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Dividend Taxes and Firm Valuation: New Evidence

  • Alan J. Auerbach
  • Kevin A. Hassett

This paper extends our previous analysis (Auerbach and Hassett 2005) of the effects of the "Jobs and Growth Tax Relief Act of 2003" on firm valuation. That paper found that firms with higher dividend yields benefited more than other dividend paying firms, a result that, in itself, is consistent with both new and traditional views of dividend taxation. But further evidence favored the new view. We also found that non-dividend-paying "immature" firms experienced larger abnormal returns than other firms and that a similar bonus accrued to firms likely to issue new shares, two results that are consistent with an anticipated transition to higher dividend payments. Here, we extend our earlier analysis in two ways. First, we consider the impact of the 2004 Presidential election on option prices, to gain further insight into and confirmation of the mechanism through which the 2003 legislation affected firm values. Second, we explore in more detail the determinants of the "immaturity premium" noted above. In contrast to claims in a recent paper by Amromin et al. (2005), we find that the premium is associated with the likelihood of new share issuance, as inferred but not demonstrated in our original analysis.

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File URL: http://www.nber.org/papers/w11959.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11959.

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Date of creation: Jan 2006
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Publication status: published as Auerbach, Alan J. and Kevin Hassett. "Dividend Taxes and Firm Valuation: New Evidence." American Economic Review (May 2006): 119-123.
Handle: RePEc:nbr:nberwo:11959
Note: PE
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  1. Alan J. Auerbach & Kevin A. Hassett, 2005. "The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study," NBER Working Papers 11449, National Bureau of Economic Research, Inc.
  2. Chetty, Raj & Saez, Emmanuel, 2004. "Dividend Taxes and Corporate Behaviour: Evidence from the 2003 Dividend Tax Cut," CEPR Discussion Papers 4722, C.E.P.R. Discussion Papers.
  3. Gene Amromin & Paul Harrison & Steven Sharpe, 2008. "How Did the 2003 Dividend Tax Cut Affect Stock Prices?," Financial Management, Financial Management Association International, vol. 37(4), pages 625-646, December.
  4. Kevin A. Hassett & Alan J. Auerbach, 2005. "The 2003 Dividend Tax Cuts and the Value of the Firm," Working Papers 49878, American Enterprise Institute.
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