How Did the 2003 Dividend Tax Cut Affect Stock Prices?

41 Pages Posted: 11 Dec 2006

See all articles by Gene Amromin

Gene Amromin

Federal Reserve Bank of Chicago

Steven A. Sharpe

Federal Reserve Board - Research & Statistics

Paul Harrison

Barclays Global Investors (BGI)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2006

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 prices on high-dividend versus low-dividend paying stocks. We do not find any imprint of the dividend tax cut news on the value of the aggregate U.S. stock market. On the other hand, high-dividend stocks outperformed low-dividend stocks by a few percentage points over the event windows, suggesting that the tax cut did induce asset reallocation within equity portfolios. Finally, the positive abnormal returns on non-dividend paying U.S. stocks in 2003 do not appear to be tied to tax-cut news.

Keywords: dividends, capital taxation

JEL Classification: G11, G14, G35

Suggested Citation

Amromin, Gene and Sharpe, Steven A. and Harrison, Paul, How Did the 2003 Dividend Tax Cut Affect Stock Prices? (October 2006). FRB of Chicago Working Paper No. 2006-17. Available at SSRN: https://ssrn.com/abstract=949862 or http://dx.doi.org/10.2139/ssrn.949862

Gene Amromin (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
230 S. LaSalle
Chicago, IL 60604
United States
3123225368 (Phone)
3123226011 (Fax)

Steven A. Sharpe

Federal Reserve Board - Research & Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2875 (Phone)
202-452-3819 (Fax)

Paul Harrison

Barclays Global Investors (BGI) ( email )

45 Fremont Street
San Francisco, CA 94105
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
148
Abstract Views
1,426
rank
102,959
PlumX Metrics