On the Timing and Pricing of Dividends: Reply
14 Pages Posted: 1 Jun 2016 Last revised: 4 Jun 2016
Date Written: June 3, 2016
Schulz (2016) replicates the findings of Binsbergen, Brandt, and Koijen (2012) (BBK hereafter) and agrees that the average pre-tax returns on short-term dividend strips are higher than those of the index, but argues that the after-tax returns are not. He thus provides a possible economic interpretation of the results in BBK: taxes. Schulz (2016) estimates the differential tax rates of dividends versus capital gains from ex-dividend day returns. We show that these estimated tax rates are suspect and imprecisely measured, peaking at over 100% in some periods. The results in BBK are robust to using tax rates from the literature (Sialm (2009)). The arguments in Schulz (2016) thus crucially depend on implausibly large tax estimates. We further discuss two other financial market imperfections discussed in the literature and show that they are also unlikely to explain the results in BBK.
Keywords: Term structure of equity, dividend strips, dividend futures, taxes
Suggested Citation: Suggested Citation