Taxes and dividends: The UK evidence

This paper provides empirical evidence on the simultaneous effects of both corporation and personal income taxes on dividend payment adjustments and on the behaviour of share prices on the ex-dividend dates. The results show that companies set their dividend policies to minimise their tax liability...

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Bibliographic Details
Published in:Journal of banking & finance 1996-04, Vol.20 (3), p.455-472
Main Author: Lasfer, M.Ameziane
Format: Article
Language:English
Subjects:
Banking
Corporate taxes
Corporations
Dividend policy
Dividends
Ex dividend
Ex-day price behaviour
Finance
Great Britain
Imputation tax system
Income tax
Personal taxes
Rates of return
Statistical analysis
Stock prices
Stock returns
Stocks
Studies
Tax aspects
Tax policy
Taxation
Taxes
United Kingdom
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Summary:This paper provides empirical evidence on the simultaneous effects of both corporation and personal income taxes on dividend payment adjustments and on the behaviour of share prices on the ex-dividend dates. The results show that companies set their dividend policies to minimise their tax liability and to maximise the after-tax return of their shareholders. In particular, firms that are unable to deduct the advanced corporation tax from their tax liability are found to pay low dividends. In addition, consistent with the tax hypothesis, we find that the differential taxation of dividends and capital gains results in a decrease in ex-day share prices by significantly less than the amount of the dividend. There is no evidence of a tax-induced dividend clientele.
ISSN:0378-4266
1872-6372
DOI:10.1016/0378-4266(95)00012-7