Working Paper: NBER ID: w7445
Authors: Trevor S. Harris; R. Glenn Hubbard; Deen Kemsley
Abstract: We examine the hypothesis that dividend taxes are capitalized into share prices by focusing on investors' implicit valuations of retained earnings versus paid-in equity. Retained earnings are distributable as taxable dividends, whereas paid-in equity is distributable as a tax-free return of capital. Consistent with dividend tax capitalization, firm-level results for the United States indicate that accumulated retained earnings are valued less per unit than contributed capital. In addition, differences in dividend tax rates across U.S. tax regimes are associated with predictable differences in the magnitude of the implied tax discount for retained earnings, as are differences in dividend tax rates across Australia, Japan, France, Germany, and the United Kingdom.
Keywords: No keywords provided
JEL Codes: H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher accumulated retained earnings (G32) | lower valuations (G32) |
| dividend taxes (G35) | lower valuations of retained earnings (G32) |
| differences in dividend tax rates (H23) | predictable differences in implied tax discount for retained earnings (H32) |
| cross-country variations in dividend tax rates (H29) | predictable variations in implied tax discount (H43) |