Is a Dividend Tax Penalty Incorporated into the Return on a Firm's Common Stock?
Dan S. Dhaliwal
University of Arizona - Department of Accounting
Oliver Zhen Li
National University of Singapore
University of Southern California - Leventhal School of Accounting
Journal of Accounting and Economics, Vol. 35, No. 2, April 2003
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, H24Accepted Paper Series
Date posted: January 29, 2003
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