Working Paper: CEPR ID: DP2946
Authors: Leonie Bell; Tim Jenkinson
Abstract: This Paper examines the impact of a major change in dividend taxation introduced in the UK in July 1997. The reform was structured in such a way that the immediate impact fell almost entirely on the largest investor class in the UK, namely pension funds. We analyse the behaviour of share prices around the ex-dividend day both before and after the reform to test clientele effects and the impact of taxation on the valuation of companies. We find strong clientele effects in the UK, which are consistent with the distortions introduced by the tax system (before the reform dividend income was tax-advantaged in the UK). We also find significant changes in the valuation of dividend income after the reform, in particular for high-yielding companies. These results provide strong support for the hypothesis that taxation affects the valuation of companies, and that pension funds were the effective marginal investors for high-yielding companies.
Keywords: dividend taxation; equity valuation
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 1997 UK dividend tax reform (G35) | Pension Funds as Marginal Investors (G23) |
| Pension Funds as Marginal Investors (G23) | Significant change in drop-off ratios (C46) |
| 1997 UK dividend tax reform (G35) | Valuation of Dividends (G35) |
| Taxation (H20) | Valuation of Dividends by Pension Funds (G23) |
| Clientele Effects (D26) | Investment Behavior of Pension Funds (G23) |
| 1997 UK dividend tax reform (G35) | Shifts in Asset Allocation by Pension Funds (G23) |