Dividend Yields and Stock Returns: Evidence from a Country without Taxes

33 Pages Posted: 25 Mar 2008

See all articles by Michael L. Lemmon

Michael L. Lemmon

University of Utah - Department of Finance

Thanh Lai Nguyen

University of Utah - Department of Finance

Date Written: March 18, 2008

Abstract

The positive relation between dividend yields and stock returns in the US market is well documented in recent research. However, the cause(s) of the dividend yield effect is still unknown. On the one hand, the effect can be attributed to tax as predicted in the Brennan CAPM (Brennan (1970)). On the other hand, dividend yield can proxy for omitted risk factors or variables. We document a robust dividend yield effect in the Hong Kong market where neither dividend income nor capital gains are taxed. The effect is persistent in different sub-samples by time period or by market capitalization. The yield effect is economically significant. A one percent difference in dividend yields is associated with about a two percent difference in risk-adjusted returns. While not ruling out the tax explanation, our results show there are non-tax (unknown) factors that cause the dividend yield effect.

Keywords: dividend yield effect, tax capitalization, cross-section of stock returns

JEL Classification: G12, H20

Suggested Citation

Lemmon, Michael L. and Nguyen, Thanh Lai, Dividend Yields and Stock Returns: Evidence from a Country without Taxes (March 18, 2008). Available at SSRN: https://ssrn.com/abstract=1108874 or http://dx.doi.org/10.2139/ssrn.1108874

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

Thanh Lai Nguyen (Contact Author)

University of Utah - Department of Finance ( email )

1645 E. Campus Center Drive
Salt Lake City, UT 84112
United States
801-581-4995 (Phone)

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