THE EFFECTS OF THE TAX REFORM ACT OF 1986 ON CASH DIVIDEND VALUATION (DIVIDENDS).

摘要

Researchers have been continually investigating the relationship that exists between stock prices and dividend payout or lack of it for quite some time. Because dividends are viewed as ordinary income and taxed as such, the payout is not a simple amount that can be studied exogenously; it must be seen as a payment after taxes.; The purpose of this dissertation was to test for evidence of a tax aversion effect occurring at dividend payout. A majority of previous studies have been based on empirical analysis of the capital asset pricing model (CAPM). Using multiple regression analysis, researchers have evaluated the relationship between stock prices or returns and the independent variables, which always include the market return and dividend yield. They have interpreted the presence of a positive coefficient for the dividend yield variable as an indication of other dividend effects besides an aversion to taxes. These include and are not limited to the informational effect of the dividend payout and the possibility of a clientele effect. The use of the CAPM fails to differentiate among these effects. This study took the position that specific changes in the income tax code could identify effects that are uniquely tax related and removed from other dividend effects.; The empirical effort examined the change in prices of 100 selected stocks just prior to and following ex-dividend day trading. The period under study included the three years preceding and three years following the Tax Reform Act of 1986. The Act reduced the marginal tax rate for corporations of the size found in the S+P 100 from 46% to 34%. For individuals the top marginal tax rate dropped from 50% to 28% and the exclusion of 60% of long-term capital gains was no longer available. Any dividend tax aversion that would have been present because of the tax difference on ordinary income and capital gains was eliminated; thus the tax to be paid could be postponed, but it would be at the same tax rate. The findings indicated that taxes were less influential after the Act. However, dissection of the data base revealed that 1987 data caused the majority of the swing from significantly less than full dividend price changes on ex dividend day to almost a full dividend price shift. Further study pointed to a strong clientele effect that supported the concept that taxes were important to both the individual investor and the overall market.