How Did the 2003 Dividend Tax Cut Affect Stock Prices?

33 Pages Posted: 9 Jan 2006

See all articles by Gene Amromin

Gene Amromin

Federal Reserve Bank of Chicago

Paul Harrison

Federal Reserve Board - Division of Research & Statistics

Steven A. Sharpe

Federal Reserve Board - Research & Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: December 12, 2005

Abstract

We test the hypothesis that the 2003 dividend tax cut boosted U.S. stock prices and thus lowered the cost of equity. Using an event-study methodology, we attempt to identify an aggregate stock market effect by comparing the behavior of U.S. common stock prices to that of European stocks and real estate investment trusts. We also examine the relative cross-sectional response of stock prices for high-dividend and low-dividend stocks. We find that U.S. large-cap and small-cap indexes do not outperform their European counterparts, nor REIT stocks, over the event windows, suggesting the absence of a notable aggregate stock market effect. Second, high-dividend-yield stocks outperformed low-dividend-yield stocks by a few percentage points over the event windows, consistent with the hypothesis that investors heavily discounted future dividends, though this outperformance appears to dissipate in subsequent weeks. Finally, non-dividend paying stocks are found to have outperformed the overall market by a small margin, but this result does not appear to be tied to tax-cut news, suggesting that non-tax factors were at play.

Keywords: Dividends, capital taxation

JEL Classification: G11, G14, G35

Suggested Citation

Amromin, Gene and Harrison, Paul and Sharpe, Steven A., How Did the 2003 Dividend Tax Cut Affect Stock Prices? (December 12, 2005). Finance and Economics Discussion Paper No. 2005-61. Available at SSRN: https://ssrn.com/abstract=874080 or http://dx.doi.org/10.2139/ssrn.874080

Gene Amromin

Federal Reserve Bank of Chicago ( email )

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Paul Harrison

Federal Reserve Board - Division of Research & Statistics ( email )

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Steven A. Sharpe (Contact Author)

Federal Reserve Board - Research & Statistics ( email )

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