Dividend Distribution Taxes, Stock Prices and Corporate Financial Policy: The Time Series Evidence

49 Pages Posted: 9 Dec 2016

See all articles by Shantaram P. Hegde

Shantaram P. Hegde

University of Connecticut- Finance Department

Rama Seth

Copenhagen Business School

P Srikanth

T A Pai Management Institute

Vishwanath Ramanna

Shiv Nadar University

Date Written: December 8, 2016

Abstract

We study a natural experiment to document the stock market, managerial and investor responses to introduction, withdrawal and reintroduction of dividend distribution taxes in India. We find a statistically significant three-day cumulative abnormal return of 8.69% around the introduction. When the dividend distribution tax is withdrawn or reintroduced, we find an insignificant return. We find that mostly retail investors rebalance their portfolios when personal tax rates are changed. Firms may alter their payout (but not leverage) especially when retail investors hold a larger fraction of shares. Overall, our findings provide mixed support for the tax relevance hypothesis of dividends.

Keywords: Dividend Tax, Payout Policy, Individual Investor, Financing Policy

JEL Classification: G30, G32, G35, H20

Suggested Citation

Hegde, Shantaram P. and Seth, Rama and Srikanth, P and Ramanna, Vishwanath, Dividend Distribution Taxes, Stock Prices and Corporate Financial Policy: The Time Series Evidence (December 8, 2016). Available at SSRN: https://ssrn.com/abstract=2882379

Shantaram P. Hegde

University of Connecticut- Finance Department ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-5135 (Phone)

Rama Seth

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45 3815 3815 (Phone)

P Srikanth

T A Pai Management Institute ( email )

Karnataka
India
+91-9845418657 (Phone)

HOME PAGE: http://www.tapmi.edu.in/faculty-and-research/faculty-profiles/core-faculty/

Vishwanath Ramanna (Contact Author)

Shiv Nadar University ( email )

Greater Noida
Uttar Pradesh
Greater Noida, MA U.P 123108
India

HOME PAGE: http://www.snu.edu.in

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