The Effects of Dividend Taxes on Equity Prices: A Re-examination of the 1997 U.K. Tax Reform
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
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.
Series:
Working Paper No. 2007/204
Subject:
Average effective tax rate Dividend tax Pension spending Stock markets Stocks
Frequency:
Annually
English
Publication Date:
August 1, 2007
ISBN/ISSN:
9781451867688/1018-5941
Stock No:
WPIEA2007204
Pages:
30
Please address any questions about this title to publications@imf.org