The Canadian Tax Reform and Its Effect on Stock Prices: A Note

Additional empirical evidence on the effect of the differential taxation of dividends and capital gains on stock prices is provided through an analysis of stock price changes around the 1971 Canadian Tax Reform and its subsequent amendments in 1977. The sample consists of all 140 Toronto Stock Excha...

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Bibliographic Details
Published in:The Journal of finance (New York) 1983-12, Vol.38 (5), p.1669-1675
Main Author: AMOAKO-ADU, BEN
Format: Article
Language:English
Subjects:
Dividends
Effects
Financial portfolios
Impacts
Income taxes
Investors
Personal income taxes
Stock dividends
Stock prices
Stock yields
Stocks
Studies
Tax rates
Tax reform
Yield
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Summary:Additional empirical evidence on the effect of the differential taxation of dividends and capital gains on stock prices is provided through an analysis of stock price changes around the 1971 Canadian Tax Reform and its subsequent amendments in 1977. The sample consists of all 140 Toronto Stock Exchange (TSE) stocks which had continuous monthly data from January 1965 to June 1978 on the Wood Gundy stock data tape and were neither mining nor oil stocks (excluded because of the complexity of their tax laws). The results of the residual analysis support the hypothesis that at the immediate period surrounding the budgets, there were significant increases in the value of high-dividend stocks, while the effect of the tax changes on the low-dividend stocks was trivial. The significant difference between the behavior of the low and high portfolios indicates that the tax changes had different impacts on the 2 subsets of the equity market and that investors took the personal tax changes into consideration in pricing stocks.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.1983.tb03850.x