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How Did the 2003 Dividend Tax Cut Affect Stock Prices?
Author(s) -
Amromin Gene,
Harrison Paul,
Sharpe Steven
Publication year - 2008
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2008.00028.x
Subject(s) - dividend , monetary economics , dividend tax , economics , financial economics , stock (firearms) , equity (law) , dividend payout ratio , capital gains tax , dividend policy , event study , real estate investment trust , business , real estate , double taxation , tax reform , finance , ad valorem tax , state income tax , paleontology , mechanical engineering , gross income , context (archaeology) , political science , law , engineering , public economics , biology
We test the hypothesis that the 2003 dividend tax cut boosted US stock prices and thereby lowered the cost of equity capital. Using an event‐study methodology, we attempt to identify an aggregate stock market effect by comparing the behavior of US common stock prices with that of foreign equities and the equities of real estate investment trusts (REITs). We also examine the relative cross‐sectional response of prices of high‐ and low‐dividend‐paying stocks. We do not find any imprint of the dividend tax cut news on the value of the aggregate US stock market. On the other hand, high‐dividend stocks outperformed low‐dividend stocks by a few percentage points over the event windows, suggesting that the tax cut may have induced asset reallocation within equity portfolios. Finally, the positive abnormal return on nondividend paying US stocks in 2003 does not appear to be tied to tax cut news.