Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts
William M. Gentry
Williams College - Department of Economics
Tulane University - Accounting & Taxation
Christopher J. Mayer
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
May 31, 2001
Dividend taxes have stimulated decades of debate regarding firm
valuation and the cost of equity capital. However, existing
evidence is mixed. In this study, we take a new approach to
examine the share price effects of dividend taxes that exploits
institutional characteristics of Real Estate Investment Trusts
(REITs), avoiding some of the complications inherent in previous
empirical work. For REITs, dividend policy is largely
non-discretionary, share repurchases do not offer tax advantages
relative to dividends, and the market value of a firm's assets
is relatively transparent to investors. In addition, REITs are
exempt from corporate taxes, so their tax deductions flow
directly to shareholders as reductions in dividend taxes.
Within this environment, we regress the market value of a
REIT's equity on the market value of its assets and its tax
basis in assets, which creates tax deductions that lower future
dividend taxes. We find that tax basis has a positive effect on
firm value, which suggests that investors capitalize future
dividend taxes into share prices.
Note: Previously titled "Are Dividend Taxes Capitalized into Share Prices? Evidence from Real Estate Investment Trusts"
Number of Pages in PDF File: 36
Date posted: January 17, 2001
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