The main purpose of this paper is to examine the impact of the integrated tax system introduced in Taiwan on the valuation of dividends. Based on Elton and Gruber’s (Rev Econ Stat 52:68–74, 1970) model, the ratio of ex-day price drop to cash dividend per share (i.e., the drop-off ratio) should reflect the relative taxes on dividends and capital gains. In Taiwan, the suspension of capital gains taxes, the coexistence of taxable and non-taxable stock dividends, and the change in tick sizes allow us to control for the influences of non-tax factors on drop-off ratios. In this paper, we find significant increases in drop-off ratios for both cash dividends and taxable stock dividends after Taiwan’s tax reform (in 1998), while we find no significant changes in drop-off ratios for non-taxable stock dividends. These results provide further evidence to support the argument that tax affects the valuation of firms.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Aug 5, 2011
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