Is a Dividend Tax Penalty Incorporated into the Return on a Firm's Common Stock?

Abstract:     
We find that a firm's dividend yield has a positive impact on its common stock return that is decreasing in the level of institutional and corporate ownership, our indicator of whether the marginal investor in a firm's common stock is more likely to be a low-tax or a high-tax investor. These results suggest that 1) a dividend tax penalty is incorporated into the return on a firm's common stock and 2) both a firm's dividend policy and its ownership structure impact the size of the dividend tax penalty.

Keywords: taxes, dividend tax capitalization, expected return on common stocks

JEL Classification: G12, G35, H24

Accepted Paper Series