The Share Price Effects of Dividend Taxes and Tax Imputation Credits

We examine the hypothesis that dividend taxes are capitalized into share prices by focusing on investors' implicit valuations of retained earnings versus paid-in equity. Retained earnings are distributable as taxable dividends, whereas paid-in equity is distributable as a tax-free return of capital. Consistent with dividend tax capitalization, firm-level results for the United States indicate that accumulated retained earnings are valued less per unit than contributed capital. In addition, differences in dividend tax rates across U.S. tax regimes are associated with predictable differences in the magnitude of the implied tax discount for retained earnings, as are differences in dividend tax rates across Australia, Japan, France, Germany, and the United Kingdom.

Dividend Tax Capitalization: Further Thoughts, Comments, and Response to Michelle Hanlon, James Myers, and Terry Shevlin

Recent studies by Hanlon, Myers, and Shevlin (2001) and Dhaliwal et al. (2001) have stirred considerable interest in the topic of dividend tax capitalization. In these papers HMS and DEMB take a critical look at the theory and findings in Harris and Kemsley (1999). In a prior paper I provide preliminary thoughts and responses to the concerns they raise. Since that time I have received many follow-up queries, especially in regard to issues raised by Hanlon, Myers, and Shevlin (2001). In this paper I provide answers to the recent queries. I also express my latest thoughts and comments regarding the tax capitalization debate, and I argue the evidence in all eight HMS tables is consistent with predictions from the model in Harris and Kemsley (1999).Dividends, Taxes, Residual-income

Perspectives on David Guenther's and Richard Sansing's 'Fundamentals of Shareholder Tax Capitalization'

A great deal of recent debate has revolved around the role for the RE/BV x NI interaction term in the equations used by Harris and Kemsley (1999) and follow-up studies, challenging the decision to include the term (see, e.g., Hanlon, Myers, and Shevlin, 2001, and Dhaliwal, Erickson, Myers, and Banyi, 2001). Guenther and Sansing (2002) address the issue directly, providing a set of sufficient conditions under which the interaction term is required. Their analysis, along with the extant empirical evidence, suggests it is critical to include the interaction term in empirical equations, else mis-specification results. Nevertheless, the analysis also indicates that the tax interpretation for retained earnings coefficients is not as clear as implied by Harris and Kemsley (1999). In this brief comment, I provide perspectives on the analysis in Guenther and Sansing (2002), and I flesh it out by showing the effects of adding another key assumption to their model.Dividend Tax Capitalization, Cost of Capital

Valuation of the Debt-Tax Shield

In this study, we use cross-sectional regressions to estimate the value of the debt-tax shield. Recognizing that debt is correlated with the value of operations along nontax dimensions, we estimate reverse regressions in which we regress future profitability on firm value and debt rather than regressing firm value on debt and profitability. Reversing the regressions mitigates bias and facilitates the use of market information to control for differences in risk and expected growth. Our estimated value for the debt-tax shield is approximately 40 percent (ten percent) of debt balances (firm value), net of the personal tax disadvantage of debt. In addition, our estimates for the debt-tax shield vary across tax regimes and across firms in a predictable manner.Capital Structure, Corporate Taxes, Personal Taxes, Debt-tax Shield