Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts

36 Pages Posted: 17 Jan 2001

See all articles by William M. Gentry

William M. Gentry

Williams College - Department of Economics

Deen Kemsley

Tulane University - Accounting & Taxation

Christopher J. Mayer

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: May 31, 2001

Abstract

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"

Suggested Citation

Gentry, William M. and Kemsley, Deen and Mayer, Christopher J., Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts (May 31, 2001). Available at SSRN: https://ssrn.com/abstract=254508 or http://dx.doi.org/10.2139/ssrn.254508

William M. Gentry (Contact Author)

Williams College - Department of Economics ( email )

Fernald House
Williamstown, MA 01267
United States
413-597-4257 (Phone)
413-597-4045 (Fax)

Deen Kemsley

Tulane University - Accounting & Taxation ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Christopher J. Mayer

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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