Why Did Non-Dividend Paying Firms Benefit More from the 2003 Dividend Tax Cut? Evidence from SEOs

Abstract:     
This paper shows that for a sample of firms offering SEOs non dividend paying firms experienced larger valuation gains from the 2003 dividend tax cut as compared to dividend paying firms. Using a growth option valuation framework, our findings indicate that the growth option revaluation benefited the non dividend paying firms more. In particular, the book leverage exhibited a significant increase in the valuation of the option for non dividend paying firms, but not for dividend paying firms. The finding is consistent with theories of optimal leverage which contend debt reduces costs of overinvestment.

Number of Pages in PDF File: 47

Keywords: SEO, JGTRRA, Dividend, Tax, Growth option, Announcement Effects, Valuation, Leverage

JEL Classification: G24, G32, G35

working papers series