Dividend taxation and equity value
Piersol, Jacob Stuart
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The passage of the Jobs and Growth Tax Relief Reconciliation Act (the Tax Relief Act) in May of 2003 presented researchers with an opportunity to empirically test whether shareholder-level dividend taxation has an e ect on share prices. The majority of the previous work addressing this question supports the idea that taxes on dividends a ect stock prices, but there is disagreement over whether or not the e ect of taxation is related to the magnitude of dividend yield. In this paper, I test the null hypothesis that shareholder-level dividend taxation has no e ect on share prices. This paper makes a contribution to the current literature in that I include a proxy for liquidity as a control variable and test whether there is any interaction between highly illiquid stocks and dividend yield relative to stock prices. The ndings presented here support previous authors' ndings that a decrease in shareholder-level taxes on dividends a ects share prices. However, I do not nd that the e ect on prices increases with dividend yield. I also nd that liquid stocks tend to realize lower abnormal returns during the period surrounding the Tax Relief Act than less liquid stocks. To my knowledge, no other work has discussed such an interaction between dividend yield and liquidity.