IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v85y1995i3p532-51.html
   My bibliography  Save this article

A Tax-Based Test of the Dividend Signaling Hypothesis

Author

Listed:
  • Bernheim, B Douglas
  • Wantz, Adam

Abstract

The authors propose and implement a new test of the dividend signaling hypothesis. Dividend signaling models generally imply that an increase in dividend taxation should increase the share price response per dollar of dividends (or 'bang-for-the-buck'). Many other dividend-preference theories have the opposite implication. An analysis of recent variations in tax policy reveals a strong positive relation between dividend tax rates and the bang-for-the-buck. Additional evidence on the relation between the bang-for-the-buck and other variables that are related to the marginal cost of paying dividends provides further support for dividend signaling. Copyright 1995 by American Economic Association.

Suggested Citation

  • Bernheim, B Douglas & Wantz, Adam, 1995. "A Tax-Based Test of the Dividend Signaling Hypothesis," American Economic Review, American Economic Association, vol. 85(3), pages 532-551, June.
    • Handle: RePEc:aea:aecrev:v:85:y:1995:i:3:p:532-51
    as

    Download full text from publisher

    File URL: http://links.jstor.org/sici?sici=0002-8282%28199506%2985%3A3%3C532%3AATTOTD%3E2.0.CO%3B2-V&origin=repec
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    2. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    3. MacKie-Mason, Jeffrey K, 1990. "Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
    4. Hakansson, Nils H, 1982. "To Pay or Not to Pay Dividend," Journal of Finance, American Finance Association, vol. 37(2), pages 415-428, May.
    5. Praveen Kumar, 1988. "Shareholder-Manager Conflict and the Information Content of Dividends," The Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 111-136.
    6. Ofer, Aharon R & Siegel, Daniel R, 1987. "Corporate Financial Policy, Information, and Market Expectations: An Empirical Investigation of Dividends," Journal of Finance, American Finance Association, vol. 42(4), pages 889-911, September.
    7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    8. Aharony, Joseph & Swary, Itzhak, 1980. "Qtrly Dividend and Earnings Announcements and Stockholders' Returns: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 35(1), pages 1-12, March.
    9. B. Douglas Berhheim, 1991. "Tax Policy and the Dividend Puzzle," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 455-476, Winter.
    10. Asquith, Paul & Mullins, David W, Jr, 1983. "The Impact of Initiating Dividend Payments on Shareholders' Wealth," The Journal of Business, University of Chicago Press, vol. 56(1), pages 77-96, January.
    11. Brickley, James A., 1983. "Shareholder wealth, information signaling and the specially designated dividend : An empirical study," Journal of Financial Economics, Elsevier, vol. 12(2), pages 187-209, August.
    12. Ambarish, Ramasastry & John, Kose & Williams, Joseph, 1987. "Efficient Signalling with Dividends and Investments," Journal of Finance, American Finance Association, vol. 42(2), pages 321-343, June.
    13. Charest, Guy, 1978. "Dividend information, stock returns and market efficiency-II," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 297-330.
    14. Pettit, R Richardson, 1972. "Dividend Announcements, Security Performance, and Capital Market Efficiency," Journal of Finance, American Finance Association, vol. 27(5), pages 993-1007, December.
    15. Nils H. Hakansson., 1982. "To Pay or Not to Pay Dividends," Research Program in Finance Working Papers 124, University of California at Berkeley.
    16. Poterba, James M. & Summers, Lawrence H., 1983. "Dividend taxes, corporate investment, and `Q'," Journal of Public Economics, Elsevier, vol. 22(2), pages 135-167, November.
    17. Balcer, Yves & Judd, Kenneth L, 1987. "Effects of Capital Gains Taxation on Life-Cycle Investment and Portfolio Management," Journal of Finance, American Finance Association, vol. 42(3), pages 743-758, July.
    18. Watts, Ross, 1973. "The Information Content of Dividends," The Journal of Business, University of Chicago Press, vol. 46(2), pages 191-211, April.
    19. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
    20. Laub, P Michael, 1976. "On the Informational Content of Dividends," The Journal of Business, University of Chicago Press, vol. 49(1), pages 73-80, January.
    21. Kane, Alex & Lee, Young Ki & Marcus, Alan, 1984. "Earnings and Dividend Announcements: Is There a Corroboration Effect?," Journal of Finance, American Finance Association, vol. 39(4), pages 1091-1099, September.
    22. Shefrin, Hersh M. & Statman, Meir, 1984. "Explaining investor preference for cash dividends," Journal of Financial Economics, Elsevier, vol. 13(2), pages 253-282, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
    2. Roni Michaely & Stefano Rossi & Michael Weber & Michael Weber, 2017. "The Information Content of Dividends: Safer Profits, Not Higher Profits," CESifo Working Paper Series 6751, CESifo.
    3. B. Douglas Bernheim & Lee Redding, 1995. "Optimal Money Burning," Working Papers 96010, Stanford University, Department of Economics.
    4. DeAngelo, Harry & DeAngelo, Linda & Skinner, Douglas J., 1996. "Reversal of fortune Dividend signaling and the disappearance of sustained earnings growth," Journal of Financial Economics, Elsevier, vol. 40(3), pages 341-371, March.
    5. Hussein Abedi Shamsabadi & Byung-Seong Min & Richard Chung, 2016. "Corporate governance and dividend strategy: lessons from Australia," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 583-610, October.
    6. Mbodja Mougoué & Ramesh P. Rao, 2003. "The Information Signaling Hypothesis of Dividends: Evidence from Cointegration and Causality Tests," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 441-478, April.
    7. Ahmad Ahmadpour & Mahmoud yahyazadefar & Babak Garmroudi, 2006. "The Influence of Agency Costs on Dividend Policy in an Emerging Market: “Evidence from the Tehran Stock Exchange”," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 11(1), pages 59-80, winter.
    8. repec:hur:ijaraf:v:5:y:2015:i:1:p:130-136 is not listed on IDEAS
    9. Goergen, Marc & Renneboog, Luc & Correia da Silva, Luis, 2005. "When do German firms change their dividends?," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 375-399, March.
    10. H.Kent Baker & Gary E. Powell & E.Theodore Veit, 2002. "Revisiting the dividend puzzle," Review of Financial Economics, John Wiley & Sons, vol. 11(4), pages 241-261.
    11. Brav, Alon & Graham, John R. & Harvey, Campbell R. & Michaely, Roni, 2005. "Payout policy in the 21st century," Journal of Financial Economics, Elsevier, vol. 77(3), pages 483-527, September.
    12. Blau, Benjamin M. & Fuller, Kathleen P., 2008. "Flexibility and dividends," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 133-152, April.
    13. Renneboog, L.D.R. & Trojanowski, G., 2005. "Patterns in Payout Policy and Payout Channel Choice of UK Firms in the 1990s," Discussion Paper 2005-002, Tilburg University, Tilburg Law and Economic Center.
    14. Ofer, Aharon R & Thakor, Anjan V, 1987. "A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchases and Dividends," Journal of Finance, American Finance Association, vol. 42(2), pages 365-394, June.
    15. Wei Hao & Udomsak Wongchoti & Martin Young & Jianguo Chen, 2021. "R2 and the corporate signaling effect," International Review of Finance, International Review of Finance Ltd., vol. 21(4), pages 1353-1381, December.
    16. Hanaan Yaseen & Ruxandra Trifan, 2019. "The Impact of Dividend Events on Stock Returns: Findings on Companies Listed on the Bucharest Stock Exchange," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 11(2), pages 59-78, December.
    17. Larry H. P. Lang & Mara Faccio & Leslie Young, 2001. "Dividends and Expropriation," American Economic Review, American Economic Association, vol. 91(1), pages 54-78, March.
    18. Arturo, Ramirez Verdugo, 2004. "Dividend Signaling and Unions," MPRA Paper 2273, University Library of Munich, Germany, revised 04 Oct 2006.
    19. Carlos Martins, 2007. "Consistency of Dividend Signalling and Future Maturity Level:Evidence from UK Data," Working Papers de Economia (Economics Working Papers) 40, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
    20. Brucato, Peter Jr. & Smith, David M., 1997. "An analysis of the role of firm reputation in the market's reaction to corporate dividends," The Quarterly Review of Economics and Finance, Elsevier, vol. 37(3), pages 647-665.
    21. Darren K. Hayunga & Clifford P. Stephens, 2009. "Dividend behaviour of US equity REITs," Journal of Property Research, Taylor & Francis Journals, vol. 26(2), pages 105-123, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:85:y:1995:i:3:p:532-51. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.