The relative valuation of dividends and capital gains in Finland

Pasi Sorjonen
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Pasi Sorjonen: Pellervo Economic Research Institute

Finnish Economic Papers, 1988, vol. 1, issue 1, 105-117

Abstract: This study examines the relative valuation of dividends and capital gains in the Finnish stock market in 1960-1985. Stock prices fell on ex-dividend days by less than Ihe amount of dividend implying that investors faced lower marginal tax rates on capital gains than on dividend income. It is, however, the total tox liability of the company and the shareholder together that should be used to infer market preference for dividends or capital gains. Using the estimation results of our ex-dividend analysis and estimates of corporate tax rates on retained and distributed profit we find that investors have shifted from capital gains preference to dividend preference. The reason for this outcome is the tax advantage of distributed profit in corporate taxation which has outweighted the tax disadvantage of dividend income in personal taxation.

Date: 1988
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Persistent link: https://EconPapers.repec.org/RePEc:fep:journl:v:1:y:1988:i:1:p:105-117

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