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How Did the 2003 Dividend Tax Cut Affect Stock Prices and Corporate Payout Policy?


Gene Amromin


Federal Reserve Bank of Chicago

Paul Harrison


Federal Reserve Board - Division of Research & Statistics

Nellie Liang


Federal Reserve Board

Steven A. Sharpe


Federal Reserve Board - Research & Statistics

December 2005

FEDs Working Paper No. 2005-57

Abstract:     
We examine the effects of the 2003 dividend tax cut on U.S. stock prices and corporate payout policies. First, using an event-study methodology, we compare the performance of U.S. stocks to that of other securities that should not have benefited from the tax change. We find that U.S. large-cap and small-cap indexes do not outperform their European counterparts, nor REIT stocks, over the event windows, suggesting little if any aggregate stock market effect from the tax change. In cross-sectional analysis, high-dividend stocks outperformed low-dividend stocks by a few percentage points over the event windows. On the other hand, non-dividend paying stocks are found to have outperformed the overall market by a small margin, but this result does not appear specific to the event windows, suggesting that non-tax factors were at play. Second, the tax change did appear to induce an increase in dividends, especially at firms where executive compensation was weighted more heavily toward stock than options. However, the effect on total payouts was more muted, as many firms scaled back share repurchases.

Number of Pages in PDF File: 28

Keywords: Dividends, capital taxation, share repurchases, executive compensation

JEL Classification: G11, G14, G35

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Date posted: January 5, 2006  

Suggested Citation

Amromin, Gene and Harrison, Paul and Liang, Nellie and Sharpe, Steven A., How Did the 2003 Dividend Tax Cut Affect Stock Prices and Corporate Payout Policy? (December 2005). FEDs Working Paper No. 2005-57. Available at SSRN: http://ssrn.com/abstract=873879 or http://dx.doi.org/10.2139/ssrn.873879

Contact Information

Gene Amromin
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
230 S. LaSalle
Chicago, IL 60604
United States
3123225368 (Phone)
3123226011 (Fax)
Paul Harrison
Federal Reserve Board - Division of Research & Statistics ( email )
20th and C Streets, NW
Washington, DC 20551
United States
202-452-3637 (Phone)
202-452-3819 (Fax)
Nellie Liang
Federal Reserve Board ( email )
Capital Markets Section
20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2918 (Phone)
202-452-3819 (Fax)
Steven A. Sharpe (Contact Author)
Federal Reserve Board - Research & Statistics ( email )
20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2875 (Phone)
202-452-3819 (Fax)
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