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MAY 1982 The Effects of Dividends on Common Stock Prices Tax Effects or Information Effects? ROBERT H. LITZENBERGER and KRISHNA RAMASWAMY* I. Introduction THERE HAS BEEN considerable controversy concerning the effect of dividend yields on common stock returns. The controversy centers on whether or not the positive association between common stock returns and dividend yields reported in a number of empirical studies can be attributed entirely to information effects. The purpose of this paper is to provide a brief critique of the theory and of the available empirical evidence (Section 11), and to present some new empirical results (Section 111).It is shown that there is a positive and non-linear relationship between common stock returns and expected dividend yield. The prediction rule for expected dividends is based solely on information that would have been available to the investor ex-ante. These results cannot, therefore, be attributed to the favorable or unfavorable information that would be present in a proxy for expected dividend yield that anticipates the occurrence (or lack thereof) of a dividend. I . Review of Theory I1 Brennan (1970) was the first to develop an After-tax Capital Asset Pricing Model. The model was derived under the assumptions of
The Journal of Finance – Wiley
Published: May 1, 1982
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