New Evidence that Taxes Affect the Valuation of Dividends

James Poterba and Lawrence H. Summers

No 1288, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper uses British data to examine the effects of dividend taxes on investors' relative valuation of dividends and capital gains. British data offer great potential to illuminate the dividends and taxes question, since there have been two radical changes and several minor reforms in British dividend tax policy during the last twenty-five years. Studying the relationship between dividends and stockprice movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors' valuation of dividends. Using daily data on a small sample of firms, and monthly data on a much broader sample, we find clear evidence that taxes change equilibrium relationships between dividend yields and market returns. These findings suggest that taxes are important determinants of security market equilibrium, and deepen the puzzle of why firms pay dividends.

Date: 1984-03
Note: PE
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Published as Poterba, James M. and Lawrence H. Summers. "New Evidence that Taxes Affectthe Valuation of Dividends." Journal of Finance, Vol. 39, No. 5, (December 1984), pp. 1397-1415.

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Journal Article: New Evidence that Taxes Affect the Valuation of Dividends (1984)
Working Paper: New Evidence that Taxes Affect the Valuation of Dividends (1984)
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