Taxation and the Stock Market Valuation of Capital Gains and Dividends: Theory and Empirical Results (Rev)

47 Pages Posted: 4 Jul 2004 Last revised: 16 Aug 2010

See all articles by Roger H. Gordon

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

David F. Bradford

Princeton University, Woodrow Wilson School; NBER; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 1979

Abstract

Dividends seem to be more heavily taxed than capital gains. Why then do corporations pay dividends rather than repurchasing shares or retaining earnings? Either corporations are not acting in the interests of shareholders, or else shareholders desire dividends sufficiently for nontax reasons to offset the tax effect. In this paper, we measure the relative valuation of dividends and capital gains in the stock market, using a variant of the capital asset pricing model. We find that dividends are not valued differently systematically from capital gains. This finding is consistent with share price maximization by firms but inconsistent with the fact that most shareholders pay a heavier tax on dividends. We also show that the relative value of dividends provides an indirect measure of a marginal Tobin's q. The measured value of dividends relative to capital gains tends to be higher during prosperous periods, as is consistent with this interpretation. We hope that this time series on a marginal Tobin's q will prove to be useful in forecasting the rate of investment.

Suggested Citation

Gordon, Roger H. and Bradford, David F., Taxation and the Stock Market Valuation of Capital Gains and Dividends: Theory and Empirical Results (Rev) (November 1979). NBER Working Paper No. w0409. Available at SSRN: https://ssrn.com/abstract=262038

Roger H. Gordon (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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David F. Bradford

Princeton University, Woodrow Wilson School ( email )

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