Working Paper: NBER ID: w11959
Authors: Alan Auerbach; Kevin Hassett
Abstract: This paper extends our previous analysis (Auerbach and Hassett 2005) of the effects of the "Jobs and Growth Tax Relief Act of 2003" on firm valuation. That paper found 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 favored the new view. We also found that non-dividend-paying "immature" firms experienced larger abnormal returns than other firms and that a similar bonus accrued to firms likely to issue new shares, two results that are consistent with an anticipated transition to higher dividend payments. \nHere, we extend our earlier analysis in two ways. First, we consider the impact of the 2004 Presidential election on option prices, to gain further insight into and confirmation of the mechanism through which the 2003 legislation affected firm values. Second, we explore in more detail the determinants of the "immaturity premium" noted above. In contrast to claims in a recent paper by Amromin et al. (2005), we find that the premium is associated with the likelihood of new share issuance, as inferred but not demonstrated in our original analysis.
Keywords: dividend taxes; firm valuation; tax policy
JEL Codes: G12; H22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dividend yield (G35) | abnormal return (G14) |
| probability of new share issuance (G12) | abnormal return (G14) |
| immature firms (L26) | abnormal return (G14) |
| 2004 presidential election (K16) | valuation effect of dividend yield (G35) |
| 2004 presidential election (K16) | valuation effect of share issuance likelihood (G32) |
| 2004 presidential election (K16) | bonus to immature firms (L26) |