Investment Taxes and Equity Returns

Posted: 16 Mar 2006 Last revised: 13 Jul 2008

See all articles by Clemens Sialm

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 9, 2006

Abstract

This paper investigates whether investors are compensated for the tax burden of equity securities. Effective tax rates on equity securities vary over time due to frequent tax reforms and cross-sectionally due to persistent differences in propensities to pay dividends. The paper finds an economically and statistically significant relationship between risk-adjusted stock returns and effective personal tax rates using a new data set covering tax burdens on a cross-section of equity securities between 1927 and 2004. Consistent with tax capitalization, stocks facing higher effective tax rates tend to compensate taxable investors by generating higher before-tax returns.

Keywords: Tax Capitalization, Limits to Arbitrage, Dividend Payments

JEL Classification: G12, G18, H24

Suggested Citation

Sialm, Clemens, Investment Taxes and Equity Returns (July 9, 2006). EFA 2006 Zurich Meetings, 8th Annual Texas Finance Festival, Available at SSRN: https://ssrn.com/abstract=891077

Clemens Sialm (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

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