Capitalization of Shareholder Taxes in Stock Prices: Evidence from the Revenue Reconciliation Act of 1993

26 Pages Posted: 1 Dec 2000

See all articles by Benjamin C. Ayers

Benjamin C. Ayers

University of Georgia

C. Bryan Cloyd

Virginia Tech - Department of Accounting and Information Systems

John R. Robinson

Texas A&M University - Department of Accounting

Date Written: October 20, 2000

Abstract

We investigate the capitalization of shareholder-level taxes into stock values and provide evidence that capitalization of dividend taxes is influenced both by dividend policy and institutional ownership. We regress weekly abnormal stock returns surrounding the passage of the Revenue Reconciliation Act of 1993 on firm dividend yield, institutional ownership, and control variables. We document a negative stock price reaction conditioned on dividend yield during the two weeks in August, 1993, that Congress passed and President Clinton signed legislation that increased individual income tax rates. In addition, we find that the level of institutional holdings, which proxies for whether the marginal investor in a particular stock is an individual taxpayer, moderates this negative stock price reaction. These findings demonstrate that dividend tax capitalization depends upon both the expected dividend policy of the firm and the tax status of the marginal investor.

Keywords: Tax capitalization, dividend taxes, dividends

JEL Classification: G12, G14, G35

Suggested Citation

Ayers, Benjamin C. and Cloyd, C. Bryan and Robinson, John R., Capitalization of Shareholder Taxes in Stock Prices: Evidence from the Revenue Reconciliation Act of 1993 (October 20, 2000). Available at SSRN: https://ssrn.com/abstract=246991 or http://dx.doi.org/10.2139/ssrn.246991

Benjamin C. Ayers

University of Georgia ( email )

706-542-3772 (Phone)
706-542-3630 (Fax)

C. Bryan Cloyd

Virginia Tech - Department of Accounting and Information Systems ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States
217-333-4592 (Phone)

John R. Robinson (Contact Author)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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