Are Shareholder Dividend Taxes on Corporate Retained Earnings Impounded in Equity Prices?: Additional Evidence and Analysis

63 Pages Posted: 23 Jun 2001

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Merle Erickson

University of Chicago - Booth School of Business

Mary Margaret Myers

University of Chicago - Booth School of Business

Monica Banyi

Gonzaga University

Multiple version iconThere are 2 versions of this paper

Date Written: June 6, 2001

Abstract

Recently, several studies have concluded that individual investor level dividend taxes on corporate retained earnings are impounded in common stock prices, independent of the timing of dividend payments. We show that the model underlying these studies is internally inconsistent. We also discuss why the model of dividend tax capitalization described in these recent studies is not likely to be descriptive of the taxation of corporate distributions, and we present several reasons, with corroborating data, to believe that common stock prices are not affected by dividend taxes in the manner articulated in these studies. Our empirical results can be summarized as follows. We replicate some of the basic results of prior dividend capitalization studies. We test for evidence of dividend tax capitalization around tax rate changes resulting from the ERTA81, the TRA86 and the OBRA93. Using the same methodology employed in recent research, the evidence does not support dividend tax capitalization across the three tax regimes. We also perform numerous additional data analyses that in general produce results that do not support the conclusions of recent dividend tax capitalization studies. Finally, we find that after controlling for market to book ratios, the main results in prior studies vanish. Overall, the analyses and evidence in this study indicate that shareholder dividend taxes on corporate retained earnings are not impounded in stock prices.

Keywords: Taxes, Dividends, Tax capitalization

JEL Classification: G12, H24, G35

Suggested Citation

Dhaliwal, Dan S. and Erickson, Merle and Meyers, Mary Margaret and Banyi, Monica L., Are Shareholder Dividend Taxes on Corporate Retained Earnings Impounded in Equity Prices?: Additional Evidence and Analysis (June 6, 2001). Available at SSRN: https://ssrn.com/abstract=272663 or http://dx.doi.org/10.2139/ssrn.272663

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Merle Erickson (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-0716 (Phone)
773-702-0458 (Fax)

Mary Margaret Meyers

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-4077 (Phone)
773-702-0458 (Fax)

Monica L. Banyi

Gonzaga University ( email )

United States

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