Dividend Taxes and Firm Valuation: New Evidence

14 Pages Posted: 13 Apr 2006 Last revised: 6 Sep 2010

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: January 2006

Abstract

This paper extends our previous analysis (Auerbach and Hassett 2005) of the effects of the "Jobs and Growth Tax Relief Act of 2003" on firm valuation. That paper found 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 favored the new view. We also found that non-dividend-paying "immature" firms experienced larger abnormal returns than other firms and that a similar bonus accrued to firms likely to issue new shares, two results that are consistent with an anticipated transition to higher dividend payments.Here, we extend our earlier analysis in two ways. First, we consider the impact of the 2004 Presidential election on option prices, to gain further insight into and confirmation of the mechanism through which the 2003 legislation affected firm values. Second, we explore in more detail the determinants of the "immaturity premium" noted above. In contrast to claims in a recent paper by Amromin et al. (2005), we find that the premium is associated with the likelihood of new share issuance, as inferred but not demonstrated in our original analysis.

Suggested Citation

Auerbach, Alan Jeffrey and Hassett, Kevin A., Dividend Taxes and Firm Valuation: New Evidence (January 2006). NBER Working Paper No. w11959. Available at SSRN: https://ssrn.com/abstract=877464

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( 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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202.862.7177 (Fax)

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