The Effects of Dividend Taxes on Equity Prices: A Re-examination of the 1997 U.K. Tax Reform, Issues 2007-2204
International Monetary Fund, European Department, 2007 - Dividends - 30 pages
We re-examine the extent to which personal taxes on dividends are capitalized into the equity prices of domestic firms, using data from around the time of the 1997 U.K. dividend tax reform, which removed a significant tax credit for an important group of investors: U.K. pension funds. The tax-adjusted CAPM suggests that the impact should depend on an average of dividend tax rates across all investors, and that U.K. pension funds should reduce their holdings of the previously tax-favored asset: U.K. equities. Given that U.K. pension funds are small relative to the total size of the world capital market, a small open economy-type argument implies that the main effect of the reform would be to reduce U.K. pension funds' ownership of U.K. equities, with little impact on their price. We present evidence which is consistent with these hypotheses. We discuss why previous research (Bell and Jenkinson, 2002) reached a different conclusion.
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1997 tax reform 20 percent asset H average tax rates Bell and Jenkinson cash dividend ceteris paribus Chetty corporation tax distribution of drop-off dividend income dividend payments dividend tax credits dividend tax reform Dividend Yield Quintiles dot com bubble drop-off ratios multiplied ex-dividend day finance foreign investors foreign shareholders FTSE 100 Index Heteroskedasticity-robust standard errors holdings of U.K. impact of dividend income tax investment Jenkinson 2002 marginal shareholders mean drop-off ratio Miller and Scholes multiplied by D/Pc negative drop-off ratios obtained by regressing pre-reform period rebate refundable dividend tax regressing drop-off ratios retained earnings risk aversion risk-free asset risky assets Rosenberg and Saez share of U.K. small open economy stock market valuation sub-sample Table tax treatment tax-adjusted CAPM tax-exempt taxation trading treatment of U.K. U.K. companies U.K. dividend tax U.K. equities U.K. firms U.K. insurance companies U.K. pension funds U.K. share prices U.K. stock market valuation of U.K.