Investor Response to a Reduction in the Dividend Tax Rate: Evidence from the Jobs and Growth Tax Relief Reconciliation Act of 2003

Lightner, Teresa; Morrow, Michaele L.; Ricketts, Robert C.; Riley, Mark E.

doi:10.2308/jata.2008.30.2.21

Cited by 11 publications

(3 citation statements)

References 23 publications

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“…However, several prominent studies applying event study method to analyse the market reaction of tax news found inconsistent results. Such as positive association between tax news and stock prices have been exhibited by Baltagi et al (2006), Edwards, Lang, Maydew, and Shackelford (2004), Howton and Howton (2006), Hu (1998), Lightner, Morrow, Ricketts, andRiley (2008), Umlauf (1993) whereas, Amromin, Harrison, and Sharpe (2008), Gallemore, Maydew, and Thornock (2014), Hanlon and Slemrod (2009), Hill, Kubick, Lockhart, and Wan (2013) found a negative association between tax news and the aggregate market value of the corporations. Moreover, no significant market reaction to tax news has been found by Amromin, Harrison, Liang, and Sharpe (2005).…”

Section: Research Question and Hypothesis Developmentmentioning

confidence: 79%

Does Market React to Tax Reduction News? An Empirical Study on Corporate Tax Reduction of Bangladesh in 2017-18

Adnan¹

2019

Business, Management and Education

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Purpose – This study tries to investigate the capital market reaction to the corporate tax reduction announcement (37.5% from 40%) in Bangladesh for publicly listed Banking, Insurance and Financial Institutions of 2017-18. Methodology – This study applied an event study approach to identify any significant average abnormal returns as well as cumulative average abnormal returns of all the publicly listed Banks, Insurances and Financial institutions around the announcement period. Findings – Insignificant average abnormal return (AAR) experienced in case of Banking and Insurance industry on event day, except the financial institutions which have generated a statistically significant abnormal negative return on announcement day. The combined AAR of all three sectors has also generated statistically insignificant return around event windows which suggest that investors did not consider tax reduction news as valuable information for investment decision nor considering it as an essential factor of share value. Limitation – The study did not consider any possible extraneous variable that could result in insignificant reactions. Practical Implication – The findings of this research would considerably contribute to the financial and economic policy formulation while taken into consideration the possible impact of the policy over the capital market of Bangladesh. Originality – This study makes a considerable input to the research in the area of taxes linked to the behavioural finance applying the unique variable of investor’s reactions.

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Section: Research Question and Hypothesis Developmentmentioning

confidence: 79%

Does Market React to Tax Reduction News? An Empirical Study on Corporate Tax Reduction of Bangladesh in 2017-18

Adnan¹

2019

Business, Management and Education

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“…Moser and Puckett (2009) and Jun et al (2011) find a dividend tax clientele effect on institutional investors. Lightner et al (2008) find support for a shareholder clientele effect in dividend-paying firms following the 2003 US tax reform. Ayers et al (2002) report a negative relationship between share values and an increase in the individual…”

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 81%

The effects of a tax dividend cut on payout policies: Canadian evidence

Deslandes

Landry

Fortin

2015

International Journal of Managerial Finance

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Purpose – The purpose of this paper is to examine whether the significant dividend tax rate reduction for individual investors in Canada in 2006 affected firms’ payout policies. Design/methodology/approach – Using regression models, the authors examine the impact of the 2006 dividend tax cut on dividends and share repurchases in Canadian listed firms from 2003 to 2008. The authors also ran a multinomial logit regression to examine choices between payout policies. Findings – Following the tax cut, firms increased their dividend payouts, with larger increases for firms in which shareholders benefited from the reduced tax rate. However, the 2006 tax cut appears to have had no negative effect on distributions through share repurchases. After the 2006 dividend tax cut, firms owned by shareholders subject to dividend taxes were more likely to use a combination of distribution mechanisms than share repurchases only, dividends only, or no payouts. Practical implications – Shareholders’ tax preferences are an important factor for firms to consider when designing payout distribution policies. Following the 2006 dividend tax cut, firms increased their dividend payouts. Social implications – The findings provide tax regulators with insight into how firms react to tax reform. They suggest that firms adapt their payout policy in the face of: a noteworthy dividend tax cut (6.2 per cent); a dividend tax cut that does not encourage tax arbitrage; and a dividend tax cut that does not economically favour dividend payment over share repurchases. Originality/value – The paper considers the 2006 dividend tax rate cut in Canada, which presents a number of significant features that allow capturing the effect of a tax cut on payout policies.

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“…As a result, stock prices increased and the cost of equity capital declined. (i.e., Dhaliwal et al 2007; Auerbach and Hassett 2007;and Lightner et al 2008). Empirical tax research on JGTRRA so far has supported the idea that taxes on individual shareholders affect the pricing of stocks.…”

Section: Introductionmentioning

confidence: 95%

The Tax Disadvantage Of Ordinary Income: An Event Study On The Legislative Process Of JGTRRA

Zhou

2013

JABR

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The Jobs Growth and Tax ReliefReconciliation Act of 2003 (JGTRRA), signed into law by President George W.Bush, was a significant legislation in recent tax history. As the tax rates on capital gains anddividends are reduced to a historical low of 15%, U.S. stock prices haveincreased and the cost of equity capital declined after its passage. In contrast to the dividends and capital gainsthat receive preferential tax rates under JGTRRA, yields from U.S. Treasurybill remain tax-disadvantaged as ordinary income at a top marginal rate of 35%.Using an event study approach based ontwo years of Treasury yield observations, the author examines Treasury yield reactionsto major legislative events surrounding the passage of JGTRRA. The result suggests that a tax policyintentionally favoring dividends and capital gains over ordinary income may unintentionallypush up yields in the Treasury bill market, thereby affecting the cost ofgovernment borrowing.

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Investor Response to a Reduction in the Dividend Tax Rate: Evidence from the Jobs and Growth Tax Relief Reconciliation Act of 2003

Cited by 11 publications

References 23 publications

Does Market React to Tax Reduction News? An Empirical Study on Corporate Tax Reduction of Bangladesh in 2017-18

Does Market React to Tax Reduction News? An Empirical Study on Corporate Tax Reduction of Bangladesh in 2017-18

The effects of a tax dividend cut on payout policies: Canadian evidence

The Tax Disadvantage Of Ordinary Income: An Event Study On The Legislative Process Of JGTRRA

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