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The Share Price Effects of Dividend Taxes and Tax Imputation Credits

  • Trevor S. Harris
  • R. Glenn Hubbard
  • Deen Kemsley

We examine the hypothesis that dividend taxes are capitalized into share prices by focusing on investors' implicit valuations of retained earnings versus paid-in equity. Retained earnings are distributable as taxable dividends, whereas paid-in equity is distributable as a tax-free return of capital. Consistent with dividend tax capitalization, firm-level results for the United States indicate that accumulated retained earnings are valued less per unit than contributed capital. In addition, differences in dividend tax rates across U.S. tax regimes are associated with predictable differences in the magnitude of the implied tax discount for retained earnings, as are differences in dividend tax rates across Australia, Japan, France, Germany, and the United Kingdom.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7445.

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Date of creation: Dec 1999
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Publication status: published as Harris, Trevor S., R. Glenn Hubbard and Deen Kemsley. "The Share Price Effects Of Dividend Taxes And Tax Imputation Credits," Journal of Public Economics, 2001, v79(3,Mar), 569-596.
Handle: RePEc:nbr:nberwo:7445
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