Dividend Taxes and Firm Valuation: A Re-Examination

50 Pages Posted: 23 Jun 2001

See all articles by Michelle Hanlon

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Terry J. Shevlin

University of California-Irvine

Multiple version iconThere are 2 versions of this paper

Date Written: June 4, 2001

Abstract

Recent evidence and statements in Harris and Kemsley (1999) suggests that shareholder-level dividend taxes on retained earnings are fully impounded at the top statutory rate into stock prices. We re-examine these claims and results. Using the traditional definition of dividend tax capitalization, that asset prices will be lower if the asset returns are subject to higher taxation, we reject the claim that the valuation of retained earnings is reduced because it is subject to future taxes when distributed as dividends. Harris and Kemsley base their predictions and empirical tests on Ohlson (1995). We offer alternative formulations and interpretations of the role of contributed capital, retained earnings, and earnings in the Ohlson (1995) model. Our evidence does not reject dividend tax capitalization but does reject full dividend tax capitalization on retained earnings arising from future dividends being paid from the current stock of retained earnings. We also investigate the crucial role of the ratio of retained earnings to book value in Harris and Kemsley (1999) and report some results inconsistent with their interpretation of dividend taxes on retained earnings.

JEL Classification: G12, G35, H25

Suggested Citation

Hanlon, Michelle and Myers, James N. and Shevlin, Terry J., Dividend Taxes and Firm Valuation: A Re-Examination (June 4, 2001). Available at SSRN: https://ssrn.com/abstract=272452 or http://dx.doi.org/10.2139/ssrn.272452

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-668
Cambridge, MA 02142
United States
617-253-9849 (Phone)

James N. Myers

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

Terry J. Shevlin (Contact Author)

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

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