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Author/Editor:
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Bond, Stephen ; Klemm, Alexander ; Devereux, Michael B.
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Publication Date:
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August 01, 2007
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Electronic Access:
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Free Full text
(PDF file size is 388KB).
Use the free
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
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Summary:
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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Series:
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Working Paper No. 07/204
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Subject(s):
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United Kingdom | Tax reforms | Stock prices | Pensions | Investment | Economic models
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Author's Keyword(s):
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Tax reform | dividends | stock market. |
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English
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Publication Date:
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August 01, 2007
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Format:
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Paper
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Stock No:
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WPIEA2007204
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Pages:
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30
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Price:
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US$18.00 )
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Please address any questions about this title to
publications@imf.org
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