TY - JOUR AU - Chetty,Raj AU - Rosenberg,Joseph AU - Saez,Emmanuel TI - The Effects of Taxes on Market Responses to Dividend Announcements and Payments: What Can we Learn from the 2003 Dividend Tax Cut? JF - National Bureau of Economic Research Working Paper Series VL - No. 11452 PY - 2005 Y2 - July 2005 UR - http://www.nber.org/papers/w11452 L1 - http://www.nber.org/papers/w11452.pdf N1 - Author contact info: Raj Chetty Department of Economics Harvard University 1805 Cambridge St. Cambridge, MA 02138 Tel: 617-744-9492 E-Mail: chetty@fas.harvard.edu Joseph Rosenberg Department of Economics UC, Berkeley 521 Evans Hall #3880 Berkeley, CA 94720 E-Mail: jrosenberg@urban.org Emmanuel Saez Department of Economics University of California, Berkeley 530 Evans Hall #3880 Berkeley, CA 94720 Tel: 510/642-4631 Fax: 510/642-6615 E-Mail: saez@econ.berkeley.edu M2 - featured in NBER digest on 2005-07-04 AB - 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. ER -