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New Evidence That Taxes Affect the Valuation of Dividends
Author(s) -
POTERBA JAMES M.,
SUMMERS LAWRENCE H.
Publication year - 1984
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1984.tb04914.x
Subject(s) - dividend , valuation (finance) , economics , dividend policy , financial economics , monetary economics , affect (linguistics) , tax deferral , dividend tax , common stock , tax reform , finance , public economics , state income tax , paleontology , linguistics , philosophy , context (archaeology) , gross income , biology
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 30 years. Studying the relationship between dividends and stock price 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 affect the equilibrium relationship 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.