Working Paper: NBER ID: w11452
Authors: Raj Chetty; Joseph Rosenberg; Emmanuel Saez
Abstract: This paper investigates the effects of capital gains and dividend taxes on excess returns around announcements of dividend increases and ex-dividend days for U.S. corporations. Consistent with standard no-arbitrage conditions, we find that the ex-dividend day premium increased from 2002 to 2004 when the dividend tax rate was cut. Consistent with the signalling theory of dividends, we also find that the excess return for dividend increase announcements went down from 2002 to 2004. However, these findings are very sensitive to the years chosen for the pre-reform control period. Semi-parametric graphical analysis using data since 1962 shows that the relationship between tax rates and ex-day and announcement day premia is very fragile and sensitive to sample period choices. Strong year-to-year fluctuations in the ex-day and announcement day premia greatly reduce statistical power, making it impossible to credibly detect responses even around large tax reforms. The important non-tax factors affecting these premia must therefore be understood before progress can be made in evaluating the role of taxation in market responses.
Keywords: dividend tax cut; market response; ex-dividend day; excess returns; signaling theory
JEL Codes: G1; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dividend tax cut (G35) | increase in ex-dividend day premium (G35) |
| decrease in excess return for dividend increase announcements (G35) | weakening in market's response to dividend announcements (G14) |
| dividend tax cut (G35) | decrease in excess return for dividend increase announcements (G35) |