The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study

48 Pages Posted: 28 Jul 2005 Last revised: 20 Jul 2009

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Kevin A. Hassett

American Enterprise Institute (AEI)

Date Written: July 2005

Abstract

The "Jobs and Growth Tax Relief Act of 2003" (JGTRA03) contained a number of significant tax provisions, but the most noteworthy may have been the reduction in dividend tax rates. The political debate over the dividend tax reductions of 2003 took a number of surprising twists and turns. Accordingly, it is likely that the views of market participants concerning the probability of significant dividend tax reduction fluctuated significantly during 2003. In this paper, we use this fact to estimate the effects of dividend tax policy on firm value. We find that firms with higher dividend yields benefited more than other dividend paying firms, a result that, in itself, is consistent with both new and traditional views of dividend taxation. But further evidence points toward the new view and away from the traditional view. We also find that non-dividend-paying firms experienced larger abnormal returns than other firms as the result of the dividend tax cut, and that a similar bonus accrued to firms likely to issue new shares, two results that may appear surprising at first but are consistent with the theory developed in the paper.

Suggested Citation

Auerbach, Alan Jeffrey and Hassett, Kevin A., The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study (July 2005). NBER Working Paper No. w11449. Available at SSRN: https://ssrn.com/abstract=755686

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Kevin A. Hassett

American Enterprise Institute (AEI) ( email )

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Washington, DC 20036
United States
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202.862.7177 (Fax)

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