Dividend tax capitalization and liquidity

Stephanie A. Sikes () and Robert E. Verrecchia ()
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Stephanie A. Sikes: University of Pennsylvania
Robert E. Verrecchia: University of Pennsylvania

Review of Accounting Studies, 2015, vol. 20, issue 4, No 4, 1334-1372

Abstract: Abstract We provide a new explanation for cross-sectional variation in dividend tax capitalization. Our analysis is twofold. First, we conduct a theoretical analysis that shows that liquidity (illiquidity) mitigates (magnifies) the positive effect of dividend taxes on expected rates of return documented in prior literature. Second, we conduct an empirical analysis centered around the Jobs and Growth Tax Relief and Reconciliation Act of 2003, which reduced the difference between the maximum statutory dividend and capital gains tax rates, and find results consistent with our theory. We also provide results suggesting that institutional ownership’s mitigating effect on dividend tax capitalization documented in prior studies is attributable to stocks with greater institutional ownership being more liquid and not to the “marginal investor” being insensitive to dividend taxes.

Keywords: Dividend taxes; Liquidity; Tax capitalization; Expected rate of return (search for similar items in EconPapers)
JEL-codes: G12 G35 H24 K34 M41 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11142-015-9323-1

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