How Did the 2003 Dividend Tax Cut Affect Stock Prices and Corporate Payout Policy?
28 Pages Posted: 5 Jan 2006
There are 2 versions of this paper
How Did the 2003 Dividend Tax Cut Affect Stock Prices and Corporate Payout Policy?
Date Written: December 2005
Abstract
We examine the effects of the 2003 dividend tax cut on U.S. stock prices and corporate payout policies. First, using an event-study methodology, we compare the performance of U.S. stocks to that of other securities that should not have benefited from the tax change. We find that U.S. large-cap and small-cap indexes do not outperform their European counterparts, nor REIT stocks, over the event windows, suggesting little if any aggregate stock market effect from the tax change. In cross-sectional analysis, high-dividend stocks outperformed low-dividend stocks by a few percentage points over the event windows. On the other hand, non-dividend paying stocks are found to have outperformed the overall market by a small margin, but this result does not appear specific to the event windows, suggesting that non-tax factors were at play. Second, the tax change did appear to induce an increase in dividends, especially at firms where executive compensation was weighted more heavily toward stock than options. However, the effect on total payouts was more muted, as many firms scaled back share repurchases.
Keywords: Dividends, capital taxation, share repurchases, executive compensation
JEL Classification: G11, G14, G35
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?
By Eugene F. Fama and Kenneth R. French
-
Dividends, Share Repurchases, and the Substitution Hypothesis
By Gustavo Grullon and Roni Michaely
-
Payout Policy in the 21st Century
By Alon Brav, John R. Graham, ...
-
Payout Policy in the 21st Century
By Alon Brav, Campbell R. Harvey, ...
-
Financial Flexibility and the Choice between Dividends and Stock Repurchases
By Clifford P. Stephens, Murali Jagannathan, ...
-
By Roni Michaely and Franklin Allen
-
By Joan Farre-mensa, Roni Michaely, ...
-
Payout Policy in the 21th Century: The Data
By Alon Brav, Campbell R. Harvey, ...
-
A Catering Theory of Dividends
By Malcolm P. Baker and Jeffrey Wurgler
-
A Catering Theory of Dividends
By Malcolm P. Baker and Jeffrey Wurgler