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Stock market reactions to dividend and earnings announcements in a tax‐free environment
Author(s) -
Tee Kienpin,
Tessema Abiot M.
Publication year - 2018
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/infi.12331
Subject(s) - dividend , earnings , dividend tax , economics , monetary economics , dividend policy , dividend yield , dividend payout ratio , stock (firearms) , financial economics , stock market , capital market , retained earnings , tax reform , finance , state income tax , gross income , market economy , mechanical engineering , paleontology , horse , engineering , biology
This paper investigates the stock market reactions to dividend and earnings announcements for firms listed in the United Arab Emirates (UAE), where there is no tax on dividend income or capital gains. This tax‐free setting allows us to examine the tax‐based signalling hypothesis, which holds that a change in dividends does not offer important information when dividend income is not taxed. Contrary to the tax‐based signalling theory, we find a positive (negative) price reaction to dividend initiations and increases (dividend omissions and decreases). We further examine the signalling hypothesis, which proposes that dividends convey information about firms' future earnings. We find that the size of the dividend increases or decreases does not predict future earnings.