Can Firm-Specific Dividend Drop-Off Ratios be Used to Infer Shareholder Marginal Tax Rates?

Accounting & Finance, Forthcoming

38 Pages Posted: 1 Jul 2020

See all articles by Andrew Ainsworth

Andrew Ainsworth

University of Wollongong - School of Accounting, Economics & Finance

Adrian D. Lee

affiliation not provided to SSRN; Deakin University - Department of Finance (Property and Real Estate)

Terry S. Walter

University of Sydney; University of Technology, Sydney - School of Finance and Economics; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: April 5, 2017

Abstract

In a seminal study, Elton and Gruber (1970) argue that ex-dividend day pricing can be used to infer the marginal tax rates of shareholders. If this view is correct, managers of individual firms would be provided with information of relevance to major financing and distribution decisions. We examine ex-dividend day pricing for individual firms and ask whether their CFOs could use the history of a firm’s ex-dividend price-drop to dividend ratios to infer reasonable estimates of their shareholders’ marginal tax rates. We use TAQ data for 1,124 US firms that have at least 30 ex-dividend days during a sample period from August 1993 to October 2012. Our results show that ex-dividend day pricing is so noisy as to prohibit sensible estimates of shareholders’ marginal tax rates. In addition, the results indicate that drop-off ratios generally lie within transaction cost boundaries, consistent with a limits to arbitrage transactions’ cost explanation provided by Kalay (1982).

Keywords: Ex-dividend day,drop off ratio, marginal tax rate

JEL Classification: G10

Suggested Citation

Ainsworth, Andrew and Lee, Adrian D. and Lee, Adrian D. and Walter, Terry Stirling, Can Firm-Specific Dividend Drop-Off Ratios be Used to Infer Shareholder Marginal Tax Rates? (April 5, 2017). Accounting & Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3622752 or http://dx.doi.org/10.2139/ssrn.3622752

Andrew Ainsworth (Contact Author)

University of Wollongong - School of Accounting, Economics & Finance ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia

Adrian D. Lee

Deakin University - Department of Finance (Property and Real Estate) ( email )

70 Elgar Road
Melbourne, VIC 3125
Australia

affiliation not provided to SSRN

Terry Stirling Walter

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 3860 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=5373

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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