Fundamentals of Shareholder Tax Capitalization

31 Pages Posted: 5 Feb 2002

See all articles by David A. Guenther

David A. Guenther

University of Oregon - Department of Accounting

Richard C. Sansing

Tuck School of Business at Dartmouth

Date Written: January 2002

Abstract

We examine the current accounting controversy over dividend tax capitalization using a model in which we model explicitly the investment and dividend policies of the firm. We measure dividend tax capitalization using Tobin's q. Our analysis shows that the effect of dividend taxes on Tobin's q depends on whether the firm is in a growth stage or a mature stage, as well as on whether earnings are distributed to shareholders via dividends, stock repurchase, or liquidation.

Tobin's q for a firm in the growth stage is increasing in the dividend tax rate, and q is greater than one. When dividend irrelevance occurs for mature firms, q becomes less than one. If earnings are distributed via stock repurchases instead of dividends, q exceeds one.

We also show that investor-level taxes can either increase or decrease the value of retained earnings relative to contributed capital, depending on the stage of the firm's life cycle and how earnings are distributed.

Keywords: Dividend tax capitalization; Valuation; Tobin's q

JEL Classification: H25, G12, G35

Suggested Citation

Guenther, David A. and Sansing, Richard C., Fundamentals of Shareholder Tax Capitalization (January 2002). Tuck School of Business Working Paper No. 02-02. Available at SSRN: https://ssrn.com/abstract=299437 or http://dx.doi.org/10.2139/ssrn.299437

David A. Guenther

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5384 (Phone)

Richard C. Sansing (Contact Author)

Tuck School of Business at Dartmouth ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-0392 (Phone)
603-646-1308 (Fax)

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