New evidence that taxes affect the valuation of dividends

Article Abstract:

The effects of dividend taxes on investors' relative valuation of dividends and capital gains are examined, using British data. Examination of the relationship between dividends and stock price movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors' valuation of dividends - an opportunity which is not available in the United States, where there have been no radical tax reforms comparable to the changes in British dividend tax policy. Using daily data on a small sample of companies and monthly data on a much broader sample, definite evidence is presented that taxes change equilibrium relationships between dividend yields and market returns. The puzzle of why firms pay dividends is deepened by the finding that dividend taxes are recognized by investors and affect the ex ante returns.

Taxation, Prices and rates, Stocks, Dividends, Stock prices, Great Britain

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On economics and finance

Article Abstract:

Although finance is often identified as a subfield of economics, the two academic disciplines seem to be growing farther apart, due to differences of emphasis and technique in the research conducted within these two areas. The divergence is so pronounced that research into identical phenomena often leads to differing conclusions, depending upon whether the research was conducted by economists or financial experts. Experts in both fields seem to be unaware of the research performed in the other field. Financial economists limit their research by reference to actually observed phenomena and data from the financial markets, whereas general economists develop financial models of market efficiency and predictive testing to forecast market performance. Each approach has advantages and disadvantages; these are discussed.

United States, Research, Economic research, Comparative analysis, Financial research

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Does the stock market rationally reflect fundamental values?

Article Abstract:

Tests employed by researchers to assess the efficiency of stock markets and other financial markets are examined to determine whether these tests are adequate. The examination reveals lower test performance than expected. However, it is also pointed out that inaccurate market valuations cannot be tied to stock prices in any discernible or predictable pattern; therefore, it is the speculation on the market which guarantees that stock prices are rational and, most often, realistic. A discussion of the research paper notes that the inadequacies of statistical tests have been realized for years, and points out that this research, while quantifying some of these inadequacies, does little to promote the development of more efficient market efficiency tests.

Conferences, meetings and seminars, Stock-exchange, Stock exchanges, Securities, Corporations, Valuation, American Finance Association

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