IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/8486.html
   My bibliography  Save this paper

Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts

Author

Listed:
  • William M. Gentry
  • Deen Kemsley
  • Christopher J. Mayer

Abstract

Financial economists have debated the impact of dividend taxes on firm valuation for decades, but existing empirical evidence is mixed. In this study, we avoid certain complications inherent in previous empirical work by exploiting institutional characteristics of Real Estate Investment Trusts (REITs). For REITs, dividend policy is largely non-discretionary, share repurchases are not tax advantaged relative to dividends, and the market value of a firm's assets is relatively transparent to investors. In addition, REITs are exempt from corporate taxes, so their tax deductions flow directly to shareholders as reductions in dividend taxes. Within this environment, we regress the market value of a REIT's equity on the market value of its assets and its tax basis in assets, which creates tax deductions that lower future dividend taxes. We find that tax basis has a positive effect on firm value, which suggests that investors capitalize future dividend taxes into share prices.

Suggested Citation

  • William M. Gentry & Deen Kemsley & Christopher J. Mayer, 2001. "Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts," NBER Working Papers 8486, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8486
    Note: PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w8486.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Su Han Chan & Wai Kin Leung & Ko Wang, 1998. "Institutional Investment in REITs: Evidence and Implications," Journal of Real Estate Research, American Real Estate Society, vol. 16(3), pages 357-374.
    2. Green, Richard C. & Hollifield, Burton, 2003. "The personal-tax advantages of equity," Journal of Financial Economics, Elsevier, vol. 67(2), pages 175-216, February.
    3. Miller, Merton H. & Scholes, Myron S., 1978. "Dividends and taxes," Journal of Financial Economics, Elsevier, vol. 6(4), pages 333-364, December.
    4. Roger H. Gordon & David F. Bradford, 1980. "Taxation and the stock market valuation of capital gains and dividends : Theory and emphirical results," NBER Chapters,in: Econometric Studies in Public Finance, pages 109-136 National Bureau of Economic Research, Inc.
    5. Blume, Marshall E, 1980. "Stock Returns and Dividend Yields: Some More Evidence," The Review of Economics and Statistics, MIT Press, vol. 62(4), pages 567-577, November.
    6. Hyslop, Dean R & Imbens, Guido W, 2001. "Bias from Classical and Other Forms of Measurement Error," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 475-481, October.
    7. Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
    8. Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
    9. Litzenberger, Robert H & Ramaswamy, Krishna, 1982. " The Effects of Dividends on Common Stock Prices: Tax Effects or Information Effects?," Journal of Finance, American Finance Association, vol. 37(2), pages 429-443, May.
    10. Kalay, Avner, 1982. " The Ex-Dividend Pay Behavior of Stock Prices: A Re-Examination of the Clientele Effect," Journal of Finance, American Finance Association, vol. 37(4), pages 1059-1070, September.
    11. Malkiel, Burton G, 1977. "The Valuation of Closed-End Investment-Company Shares," Journal of Finance, American Finance Association, vol. 32(3), pages 847-859, June.
    12. Miller, Merton H & Scholes, Myron S, 1982. "Dividends and Taxes: Some Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1118-1141, December.
    13. repec:bla:joares:v:37:y:1999:i:2:p:275-291 is not listed on IDEAS
    14. Frank, Murray & Jagannathan, Ravi, 1998. "Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes," Journal of Financial Economics, Elsevier, vol. 47(2), pages 161-188, February.
    15. Poterba, James M & Summers, Lawrence H, 1984. " New Evidence that Taxes Affect the Valuation of Dividends," Journal of Finance, American Finance Association, vol. 39(5), pages 1397-1415, December.
    16. Litzenberger, Robert H. & Ramaswamy, Krishna, 1979. "The effect of personal taxes and dividends on capital asset prices : Theory and empirical evidence," Journal of Financial Economics, Elsevier, vol. 7(2), pages 163-195, June.
    17. 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.
    18. 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.
    19. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    20. Bali, Rakesh & Hite, Gailen L., 1998. "Ex dividend day stock price behavior: discreteness or tax-induced clienteles?," Journal of Financial Economics, Elsevier, vol. 47(2), pages 127-159, February.
    21. Andy Naranjo & M. Nimalendran & Mike Ryngaert, 2000. "Time Variation of Ex-Dividend Day Stock Returns and Corporate Dividend Capture: A Reexamination," Journal of Finance, American Finance Association, vol. 55(5), pages 2357-2372, October.
    22. Karpoff, Jonathan M. & Walkling, Ralph A., 1988. "Short-term trading around ex-dividend days : Additional evidence," Journal of Financial Economics, Elsevier, vol. 21(2), pages 291-298, September.
    23. Cutler, David M, 1988. "Tax Reform and the Stock Market: An Asset Price Approach," American Economic Review, American Economic Association, vol. 78(5), pages 1107-1117, December.
    24. Green, Richard C. & Rydqvist, Kristian, 1999. "Ex-day behavior with dividend preference and limitations to short-term arbitrage: the case of Swedish lottery bonds," Journal of Financial Economics, Elsevier, vol. 53(2), pages 145-187, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lee, Yi-Tsung & Liu, Yu-Jane & Roll, Richard & Subrahmanyam, Avanidhar, 2006. "Taxes and dividend clientele: Evidence from trading and ownership structure," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 229-246, January.
    2. Edwards, Alexander & Shevlin, Terry, 2011. "The value of a flow-through entity in an integrated corporate tax system," Journal of Financial Economics, Elsevier, vol. 101(2), pages 473-491, August.
    3. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    4. James Payne & George Waters, 2007. "Have Equity REITs Experienced Periodically Collapsing Bubbles?," The Journal of Real Estate Finance and Economics, Springer, vol. 34(2), pages 207-224, February.
    5. Chinmoy Ghosh & Erasmo Giambona & John Harding & C. Sirmans, 2011. "How Entrenchment, Incentives and Governance Influence REIT Capital Structure," The Journal of Real Estate Finance and Economics, Springer, vol. 43(1), pages 39-72, July.
    6. Mihir A Desai & Dhammika Dharmapala, 2009. "Corporate Tax Avoidance and Firm Value," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 537-546, August.
    7. William M. Gentry & Charles M. Jones & Christopher J. Mayer, 2004. "Do Stock Prices Really Reflect Fundamental Values? The Case of REITs," NBER Working Papers 10850, National Bureau of Economic Research, Inc.
    8. Gow-Cheng Huang & Kartono Liano & Ming-Shiun Pan, 2011. "REIT Stock Splits and Liquidity Changes," The Journal of Real Estate Finance and Economics, Springer, vol. 43(4), pages 527-547, November.
    9. Nam, Jouahn & Wang, Jun & Zhang, Ge, 2010. "The impact of the dividend tax cut and managerial stock holdings on corporate dividend policy," Global Finance Journal, Elsevier, vol. 21(3), pages 275-292.
    10. Zhilan Feng & Chinmoy Ghosh & Fan He & C. Sirmans, 2010. "Institutional Monitoring and REIT CEO Compensation," The Journal of Real Estate Finance and Economics, Springer, vol. 40(4), pages 446-479, May.
    11. Erik Devos & Seow Ong & Andrew Spieler, 2007. "Analyst Activity and Firm Value: Evidence from the REIT Sector," The Journal of Real Estate Finance and Economics, Springer, vol. 35(3), pages 333-356, October.
    12. Harry Huizinga & Johannes Voget & Wolf Wagner, 2008. "International Taxation and Takeover Premiums in Cross-border M&As," Working Papers 0809, Oxford University Centre for Business Taxation.
    13. William M. Gentry & Christopher J. Mayer, 2003. "What Can We Learn About the Sensitivity of Investment to Stock Prices with a Better Measure of Tobin's q?," Department of Economics Working Papers 2003-03, Department of Economics, Williams College.
    14. Qiang Li & Hua Sun & Seow Ong, 2006. "REIT Splits and Dividend Changes: Tests of Signaling and Information Substitutability," The Journal of Real Estate Finance and Economics, Springer, vol. 33(2), pages 127-150, September.
    15. Zhilan Feng & Chinmoy Ghosh & C. Sirmans, 2007. "CEO Involvement in Director Selection: Implications for REIT Dividend Policy," The Journal of Real Estate Finance and Economics, Springer, vol. 35(4), pages 385-410, November.

    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:8486. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.