Dividend Taxes and Stock Volatility

Erin E. Syron Ferris
Additional contact information
Erin E. Syron Ferris: https://www.federalreserve.gov/econres/erin-e-syron-ferris.htm

No 2015-36, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: How do dividend taxes affect stock volatility? In this paper, I use a decrease in dividend taxes as a natural experiment to identify their impact on firm's price volatility. If a risk-averse executive faces price risk through his incentive contract, changes in stock volatility due to dividend taxes may increase agency costs and therefore decrease overall welfare. Stock volatility decreased after the tax cut for firms where an executive has large holdings of shares and options relative to firms where an executive has small holdings of shares and options. Therefore, with a risk-averse executive and risk-neutral shareholders, dividend taxes may exacerbate agency costs. The increase in agency costs will decrease shareholder welfare, which can be partially offset by the use of options in the employment contract.

Keywords: Corporate finance and governance; taxation (search for similar items in EconPapers)
Pages: 40 pages
Date: 2015-05-26
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.federalreserve.gov/econresdata/feds/2015/files/2015036pap.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/FEDS.2015.036 http://dx.doi.org/10.17016/FEDS.2015.036 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2015-36

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().