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The Ex‐Dividend Day Behavior of Stock Returns: Further Evidence on Tax Effects

The Ex‐Dividend Day Behavior of Stock Returns: Further Evidence on Tax Effects The Ex-Dividend Day Behavior of Stock Returns: Further Evidence on Tax Effects PATRICK J. HESS* I. Introduction THEEFFECTS OF firms' dividend policies on stock returns have been widely studied.' For the most part researchers have documented a statistically significant relation between dividend yields and stock returns; however, the explanation of this common empirical finding has been controversial. In two important papers, Litzenberger and Ramaswamy (1979, 1980) argue that this relation is best explained by differential taxation of dividends over capital gains. Litzenberger and Ramaswamy, like Elton and Gruber (1970) and Auerbach (1981), further argue that the dividend effect is complicated by clientele effects: the marginaltax brackets implicit in security prices are negatively related to dividend yields.' The differential-tax explanation has been challenged by Blume (1980), Hess (1981),and Miller and Scholes (1981);these authors argue that the relation across securities is far too complicated to be entirely explained by tax effects. Hess conjectures that the empirical tests are clouded by the ability of dividend yields to proxy for changes in the riskiness of common stocks, and therefore, of their expected returns. Miller and Scholes outline the pitfalls of defining a dividend yield variable for a monthly trading interval; demonstrating that http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

The Ex‐Dividend Day Behavior of Stock Returns: Further Evidence on Tax Effects

The Journal of Finance , Volume 37 (2) – May 1, 1982

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References (16)

Publisher
Wiley
Copyright
1982 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1982.tb03566.x
Publisher site
See Article on Publisher Site

Abstract

The Ex-Dividend Day Behavior of Stock Returns: Further Evidence on Tax Effects PATRICK J. HESS* I. Introduction THEEFFECTS OF firms' dividend policies on stock returns have been widely studied.' For the most part researchers have documented a statistically significant relation between dividend yields and stock returns; however, the explanation of this common empirical finding has been controversial. In two important papers, Litzenberger and Ramaswamy (1979, 1980) argue that this relation is best explained by differential taxation of dividends over capital gains. Litzenberger and Ramaswamy, like Elton and Gruber (1970) and Auerbach (1981), further argue that the dividend effect is complicated by clientele effects: the marginaltax brackets implicit in security prices are negatively related to dividend yields.' The differential-tax explanation has been challenged by Blume (1980), Hess (1981),and Miller and Scholes (1981);these authors argue that the relation across securities is far too complicated to be entirely explained by tax effects. Hess conjectures that the empirical tests are clouded by the ability of dividend yields to proxy for changes in the riskiness of common stocks, and therefore, of their expected returns. Miller and Scholes outline the pitfalls of defining a dividend yield variable for a monthly trading interval; demonstrating that

Journal

The Journal of FinanceWiley

Published: May 1, 1982

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