Pricing Firms’ Responsiveness to Shareholder Tax Incentives
University of Iowa - Henry B. Tippie College of Business
University of Iowa - Department of Accounting
Ryan J. Wilson
University of Oregon - Lundquist College of Business
September 2, 2013
We use the fiscal cliff and the expiration of the Bush tax cuts at the end of 2012 to test whether investors value firms’ responsiveness to the demand for dividends. We examine the three-day stock price reaction to the announcement of special dividends and dividend accelerations in November and December of 2012. This setting provides a shock to the demand for dividends where the signaling implications of dividend announcements are substantially mitigated or absent. We find evidence that the price reaction to both special dividends and dividend accelerations is significantly larger than would be explained by tax savings alone. We also find evidence that firms who do not respond to this demand yet appear to have the resources to do so experience significantly negative abnormal returns. The magnitude of the difference in market reaction between payers and non-payers is significantly greater than the maximum economic benefits from the potential tax savings. Overall, our evidence is consistent with investors placing a premium on firms that respond to shareholder demands for a return of capital, consistent with the notion that firms rationally cater to the demand for dividends.
Number of Pages in PDF File: 44
Keywords: special dividend, catering, dividend taxes, dividend acceleration, fiscal cliff
JEL Classification: G35, G38, G32working papers series
Date posted: September 6, 2013
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