Shareholder Income Taxes and the Relation between Earnings and Returns
Posted: 15 Apr 2005
The purpose of this study is to investigate if and how shareholder level taxes affect earnings response coefficients (ERCs). Our tests indicate that when the tax rate on dividends increases, ERCs decrease for firms with high dividend yield and whose marginal investor is likely to be an individual. For firms with high share repurchase yield and whose marginal investor is likely to be an individual, an increase in dividend tax rate has no discernable effect on ERCs. These results are consistent with the notion that the tax penalty on dividends, relative to capital gains, reduces the earnings-return relation.
JEL Classification: G12, H24, G35, M41
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