Taxes and Valuation: Evidence from Dividend Change Announcements

Posted: 3 Apr 2007

See all articles by Oliver Zhen Li

Oliver Zhen Li

National University of Singapore (NUS)

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Under the US tax system, dividends are historically taxed at a higher rate than capital gains and thus incur a tax-related penalty. I provide evidence that the dividend tax penalty partially offsets the positive signaling and agency cost effects of dividends for fully taxable individual investors. The level of institutional ownership and the frequency of institutional trading, which proxy for the likelihood that the marginal investor is not a fully taxable individual, mitigate the negative dividend tax effect. My results support the notion that taxes impact equity valuation. I contribute to the literature by isolating dividends' negative tax effect from their positive signaling and agency cost effects.

Keywords: Dividend tax penalty, dividend surprises, institutional investors

JEL Classification: H24, G12, G23, G35, D82

Suggested Citation

Li, Oliver Zhen, Taxes and Valuation: Evidence from Dividend Change Announcements. Journal of American Taxation Association (JATA), Vol. 29, No. 2, 2007, Available at SSRN:

Oliver Zhen Li (Contact Author)

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228

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