Working Paper: NBER ID: w11449
Authors: Alan J. Auerbach; Kevin A. Hassett
Abstract: The "Jobs and Growth Tax Relief Act of 2003" (JGTRA03) contained a number of significant tax provisions, but the most noteworthy may have been the reduction in dividend tax rates. The political debate over the dividend tax reductions of 2003 took a number of surprising twists and turns. Accordingly, it is likely that the views of market participants concerning the probability of significant dividend tax reduction fluctuated significantly during 2003. In this paper, we use this fact to estimate the effects of dividend tax policy on firm value. We find 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 points toward the new view and away from the traditional view. We also find that non-dividend-paying firms experienced larger abnormal returns than other firms as the result of the dividend tax cut, and that a similar bonus accrued to firms likely to issue new shares, two results that may appear surprising at first but are consistent with the theory developed in the paper.
Keywords: dividend tax cuts; firm value; event study; abnormal returns
JEL Codes: G12; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dividend yield (G35) | abnormal returns (G14) |
| dividend tax cuts (G35) | firm value (G32) |
| dividend-paying firms (G35) | abnormal returns (G14) |
| non-dividend-paying firms (G35) | abnormal returns (G14) |
| dividend tax cuts (G35) | firms likely to issue new shares (G24) |