Working Paper: NBER ID: w1288
Authors: James M. Poterba; Lawrence H. Summers
Abstract: This paper uses British data to examine the effects of dividend taxes on investors' relative valuation of dividends and capital gains. British data offer great potential to illuminate the dividends and taxes question, since there have been two radical changes and several minor reforms in British dividend tax policy during the last twenty-five years. Studying the relationship between dividends and stockprice movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors' valuation of dividends. Using daily data on a small sample of firms, and monthly data on a much broader sample, we find clear evidence that taxes change equilibrium relationships between dividend yields and market returns. These findings suggest that taxes are important determinants of security market equilibrium, and deepen the puzzle of why firms pay dividends.
Keywords: dividends; taxes; valuation; capital gains; market returns
JEL Codes: H25; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| taxation of dividends (G35) | relative valuation by investors (G19) |
| changes in tax policy (H29) | expected returns investors demand (G12) |
| 1973 tax reforms (H29) | investor behavior (G41) |
| tax policy (H20) | dividend behavior (G35) |
| dividend taxes (G35) | market returns (G19) |
| dividend yields (G35) | required returns (G12) |