Keywords: Dividends, capital taxation
Abstract: We test the hypothesis that the 2003 dividend tax cut boosted U.S. stock prices and thus lowered
the cost of equity. Using an event-study methodology, we attempt to identify an aggregate stock
market effect by comparing the behavior of U.S. common stock prices to that of European stocks and
real estate investment trusts. We also examine the relative cross-sectional response of prices on
high-dividend versus low-dividend paying stocks. We do not find any imprint of the dividend tax cut
news on the value of the aggregate U.S. stock market. On the other hand, high-dividend stocks
outperformed low-dividend stocks by a few percentage points over the event windows, suggesting
that the tax cut did induce asset reallocation within equity portfolios. Finally, the positive
abnormal returns on non-dividend paying U.S. stocks in 2003 do not appear to be tied to tax-cut news.
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Last update: September 7, 2006