Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts
36 Pages Posted: 17 Jan 2001
Date Written: May 31, 2001
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"
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