A Tax-Based Test of the Dividend Signaling Hypothesis

37 Pages Posted: 9 Mar 2004 Last revised: 13 Aug 2010

See all articles by B. Douglas Bernheim

B. Douglas Bernheim

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Adam Wantz

Cornerstone Research

Date Written: December 1992


We propose and implement a new test of the dividend signaling hypothesis that is designed to discriminate between dividend signaling and other theories that would account for the apparent existence of a dividend preference. Our test refines the use of data on stock price responses to dividend announcements. In particular, we study the effect of dividend taxation on the bang-for-the-buck, which we define as the share price response per dollar of dividends. Most dividend signaling models imply that an increase in dividend taxation should increase the bang-for-the-buck. In contrast, other dividend preference theories imply that an increase in dividend taxation should decrease the bang-for-the-buck. Since there have recently been considerable variation in the tax treatment of dividends, we are able to study dividend announcement effects under different tax regimes. Our central finding is that there is a strong positive relationship between dividend tax rates and the bang-for-the-buck. This result supports the dividend signaling hypothesis, and is consistent with alternatives. The paper also provides corroborating evidence based on the relationship between the bang-for-the-buck and bond ratings.

Suggested Citation

Bernheim, B. Douglas and Wantz, Adam, A Tax-Based Test of the Dividend Signaling Hypothesis (December 1992). NBER Working Paper No. w4244. Available at SSRN: https://ssrn.com/abstract=304112

B. Douglas Bernheim (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-725-8732 (Phone)
650-725-5702 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Adam Wantz

Cornerstone Research ( email )

1000 El Camino Real
Menlo Park, CA 94025-4327
United States

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