dividend taxes and security prices the reaction of dividend-paying stocks to the jobs and growth tax...

7/28/2019 Dividend Taxes and Security Prices the Reaction of Dividend-Paying Stocks to the Jobs and Growth Tax Relief Reconciliation Act of 2003

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Welcome to Our Presentation

Group 4:

Entrepreneurs


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Topic of the Presentation

Dividend Taxes and

Security Prices: The Reaction of

Dividend-Paying Stocks to theJobs and Growth Tax Relief

Reconciliation Act of 2003


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Group Members

14092

1410014102

14103

14157


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Outline

The Act 50% reduction of tax on dividend income

No tax on dividend income

Reduction of tax from 38.6% to 15% on dividend income

Research Questions

Examine the relationship between dividend yield and share price reaction to the

announced reduction in dividend tax rates.

Examine the previously identified moderating effect of institutional ownership on the

relation between share price reaction and dividend yield.

Research Method

Use of Regression model to test the hypotheses

Results & Conclusion

Positive relationship between dividend yield and share price reaction to the Act

Level of Institutional Ownership has no impact when tax rates are decreasing.


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The Act

In May of 2003,Congress passed the Jobs and

Growth Tax Relied Reconciliation Act of 2003

which reduced the maximum individual tax rate

applicable to dividend income from 38.6% to15%, the lowest rate on dividend income in US

history.

5 months before the act is passed, the market

received some signals about what might be

included in the coming act

Analysis the affects of received information on

share prices and corporation share ownership


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Significant Events Preceding the act

Rumor of 50% reduction of the dividend taxDecember 26, 2002

Rumor of full elimination of dividend taxJanuary 6, 2003

Market learned that dividends would not besubject to full exclusion but at the rate of 15%

tax.

April 30, 2003

The bill providing for reduction in the dividendtax passed the House of RepresentativesMay 9, 2003

The bill the passed the Senate by (51-50) vote.May 15, 2003

The Act was passed by CongressMay 23, 2003


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Research Questions

First research question concerns with the

relationship between dividend yield and share

price reaction to the announced reduction individend tax rates.

Second research question examines the

moderating effect of institutional ownershipon the relation between share price reaction

and dividend yield.


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Research Questions

Different views and experts analysis:

Traditional view: Dividend tax penalizes

investors in dividend-paying firms and it

provides lower ATR.

Capitalization view: Dividend taxes are

capitalized into stock prices regardless of firms

actual dividend payouts.


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Research Questions

Ayers et al: stock prices reaction is positivelycorrelated with firm dividend yields andnegatively correlated with the degree ofinstitutional ownership of the firm.

Lightner et al: statistically significant negativerelationship between dividend yield and thechange in institutional ownership.

Dhaliwal et al: During when the dividend taxpenalty is relatively high, the cost of capital isnotably higher for high-dividend paying firms.


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Estimate the following regression model for

testing the hypothesis-

CARit=0+ 1 Eventt+ 2 Yieldi+ 3 INSTSHit+ 4

EventtYield i+ 5 YieldiINSTISHi+ 6

EventtYieldiINSTISHi+ kXki+ it

Research Method


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Research MethodWhere:

CAR(it): Cumulative abnormal return for sample firm i cumulatedover a 3-day prior beginning 1 day prior to the event date &ending 1 day after the event date.

Event(t): An indicate or equal to 1 if period t is the JGTRRA eventPeriod & 0 for the control periods surrounding JGTRRA.

Yield ( t): Common stock dividends divided by market value ofequity for firm i as December 31,2002

INSTISH(i): Percent of outstanding shares held by institutions forfirm i as of the end of the quarter prior to announcement.

X(ki): A vector of variables that control for firm attributes ,such

as firm size, profitability , book to market ratio ,risk &leverage that may be associated with stock returns duringthe sample period.


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Research Method

An event study methodology was used to investigatewhether the reduction in dividend tax ratesassociated with JGTRRA affected stock prices.

A standard market model to estimate daily abnormalreturns using a 3-day window beginning 1 day prior tothe event date & ending 1 day after the event date.

Within our presentation, we emphases on somespecific variables that we have deemed to be

relevant, i.e. EVENT x YIELD, EVENT x INSTSH x YIELD.

Moreover, we have analyzed three statisticallyarranged tables. They are:


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Research Method

Table-3. Cross-sectional OLS Regression ofCumulative Abnormal Returns onIndependent and Control Variables around

Key announcement dates leading up to theJGTRRA 2003.

Table-4. Cross-sectional OLS Regression ofCumulative Abnormal Returns onIndependent and Control Variables aroundMay 15 and 23 announcement dates.


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Research Method

Table 5. comparison of changes in

institutional ownership by yield quintiles.

We have reached at our decision by using

statistical tool correlation coefficient and

regression.

We compute each firms dividend yield by

dividing common stock dividends by the

firms market value


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Results

1. The relationship between dividend yield and

share price reaction to the announced

reduction in dividend tax rates.


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ResultsEvent Date Results Using Regression Model

December 25, 2002 (50%

Reduction of dividend tax)

EVENT * YIELD 0.092

January 6, 2003 (Elimination of

the dividend tax)

EVENT * YIELD 0.101

April 30, 2003 (Market learned

that There will not be full

exemption but 15% tax rate

will be applicable)

EVENT * YIELD Failed to find any significant

relation between yield and

abnormal return (EVENT *

YIELD). Results not reported.

May 9, 2003 (the bill passed

the house of representatives)

EVENT * YIELD Failed to find any significant

relation between yield and

abnormal return (EVENT *YIELD). Results not reported.

May 15, 2003 (the bill passed

the senate with 51-50 vote)

EVENT * YIELD .203

May 23 (the bill passed the

House of Congress)

EVENT * YIELD .141

Variable Estimated Coefficient


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Results

2. The moderating effect of institutional

ownership on the relation between share price

reaction and dividend yield.


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Results

Quintile Mean Yield(N) Changes InInstitutional

Ownership between

Quarters 3 and 4 of

2002

Changes InInstitutional

Ownership between

Quarters 1 and 2 of

2003

1 (Lowest) 0.007 -.004 0.01

2 0.017 -0.006 0.001

3 0.025 -0.006 0.007

4 0.035 -0.006 0.007

5 0.075 -0.01 0.01


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Conclusion

The is a role for dividend policy in influencingthe stock price reaction to announcement in

dividend tax changes

Level of institutional ownership has no impactwhen tax rates are decreasing, unlike the case

of rate increases


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Q&A

dividend taxes and security prices the reaction of dividend-paying stocks to the jobs and growth tax...

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