NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Effects of Taxes on Market Responses to Dividend Announcements and Payments: What Can we Learn from the 2003 Dividend Tax Cut?

Raj Chetty, Joseph Rosenberg, Emmanuel Saez

NBER Working Paper No. 11452
Issued in July 2005
NBER Program(s):   PE

This paper investigates the effects of capital gains and dividend taxes on excess returns around announcements of dividend increases and ex-dividend days for U.S. corporations. Consistent with standard no-arbitrage conditions, we find that the ex-dividend day premium increased from 2002 to 2004 when the dividend tax rate was cut. Consistent with the signalling theory of dividends, we also find that the excess return for dividend increase announcements went down from 2002 to 2004. However, these findings are very sensitive to the years chosen for the pre-reform control period. Semi-parametric graphical analysis using data since 1962 shows that the relationship between tax rates and ex-day and announcement day premia is very fragile and sensitive to sample period choices. Strong year-to-year fluctuations in the ex-day and announcement day premia greatly reduce statistical power, making it impossible to credibly detect responses even around large tax reforms. The important non-tax factors affecting these premia must therefore be understood before progress can be made in evaluating the role of taxation in market responses.

download in pdf format
   (459 K)

email paper

This paper is available as PDF (459 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11452

Published: Auerbach, A., J. Hines, and J. Slemrod (eds.) Taxing Corporate Income in the 21st Century. Cambridge: Cambridge University Press, 2007.

Users who downloaded this paper also downloaded these:
Auerbach and Hassett w11449 The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study
Chetty and Saez w10841 Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut
Poterba w10321 Taxation and Corporate Payout Policy
Chetty and Saez w10572 Do Dividend Payments Respond to Taxes? Preliminary Evidence from the 2003 Dividend Tax Cut
Chetty and Saez w13538 An Agency Theory of Dividend Taxation
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us