Fundamentals of shareholder tax capitalization

We investigate how shareholder-level taxes are capitalized into stock prices using a model that incorporates the investment and payout decisions of a firm and the investment alternatives available to investors. Shareholder taxes affect stock prices both indirectly, via the effect of taxes on corpora...

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Bibliographic Details
Published in:Journal of accounting & economics 2006-12, Vol.42 (3), p.371-383
Main Authors: Guenther, David A., Sansing, Richard
Format: Article
Language:English
Subjects:
Capital
Capitalization
Clienteles
Dividend tax capitalization
Investments
Investors
Stock prices
Stock returns
Stockholders
Studies
Tax rates
Taxes
Tobin's q
Valuation
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Summary:We investigate how shareholder-level taxes are capitalized into stock prices using a model that incorporates the investment and payout decisions of a firm and the investment alternatives available to investors. Shareholder taxes affect stock prices both indirectly, via the effect of taxes on corporate investment decisions, and directly, by reducing both the mean and variance of after-tax returns. In our model, tax capitalization is not eliminated by the presence of tax-exempt investors, does not depend on whether equity is composed of contributed capital or retained earnings, and does not depend on the tax rate faced by a hypothetical marginal investor.
ISSN:0165-4101
1879-1980
DOI:10.1016/j.jacceco.2006.03.005