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Can firm‐specific dividend drop‐off ratios be used to infer shareholder marginal tax rates?
Author(s) -
Ainsworth Andrew,
Lee Adrian D.,
Walter Terry
Publication year - 2020
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12322
Subject(s) - dividend , shareholder , economics , econometrics , dividend tax , financial economics , dividend payout ratio , marginal cost , monetary economics , dividend policy , microeconomics , tax reform , finance , corporate governance , gross income , public economics , state income tax
In a seminal study, Elton and Gruber (1970) argue that ex‐dividend day pricing can be used to infer marginal tax rates of shareholders. We examine ex‐dividend day pricing for individual firms and ask whether their CFO s could use the history of a firm's ex‐dividend price‐drop ratios to infer reasonable estimates of shareholders’ marginal tax rates. We use TAQ data for 1,124 US firms that have at least 30 ex‐dividend days during the period August 1993 to October 2012. Our results show that ex‐dividend day pricing is so noisy as to prohibit sensible estimates of shareholders’ marginal tax rates.