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The Market Valuation of Cash Dividends and the Tax Differential Theory of Dividend Policy: A Case Revisited

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  • Sterk, William E
  • Vandenberg, Pieter A

Abstract

One of the most controversial areas in finance concerns the relevance or irrelevance of dividend policy. Survey results reported by researchers indicate that corporate chief financial officers believe that dividend policy does affect stock prices. One factor that could cause dividend policy to matter is possible tax effects. However, although many maintain that tax treatment would favor low payout, Miller and Scholes argue that tax policy is irrelevant. The latest change in the tax code, which removed the lower capital gains tax rate, provides a unique opportunity to examine the relevance of tax policy along. This study revisits the Citizens Utilities case, which was used by Long and Poterba. We conclude that the market for Citizens Utilities shares indicates that tax policy does influence value. Copyright 1990 by MIT Press.

Suggested Citation

  • Sterk, William E & Vandenberg, Pieter A, 1990. "The Market Valuation of Cash Dividends and the Tax Differential Theory of Dividend Policy: A Case Revisited," The Financial Review, Eastern Finance Association, vol. 25(3), pages 441-455, August.
    • Handle: RePEc:bla:finrev:v:25:y:1990:i:3:p:441-55
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    Cited by:

    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. Rozycki, John J., 1997. "A tax motivation for smoothing dividends," The Quarterly Review of Economics and Finance, Elsevier, vol. 37(2), pages 563-578.
    3. Achmad Budi Susetyo & Agus Eko Sujianto & Mochamad Arif Faizin & Kiki Yunita Anjarsari & Charina Dwi Rivylina Nafisah, 2020. "The Indirect Impact of Profitability on Firm Value: Evidence Dividend Policy as Moderators and Capital Structure as Mediator," Technium Social Sciences Journal, Technium Science, vol. 10(1), pages 299-311, August.
    4. Ling T. He & K. Michael Casey, 2011. "On The Pricing Of Dual Class Stocks: Evidence From Berkshire Hathaway," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 5(1), pages 103-112.
    5. Bassam Jaara & Mahmoud Dalou, 2018. "Dividend Announcements of Banking Sector in Gulf Area; Pre, During and Post the Recent Global Financial Crisis," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(6), pages 20-35, June.
    6. Casey, K. Michael & Dickens, Ross N., 2000. "The effects of tax and regulatory changes on commercial bank dividend policy," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(2), pages 279-293.
    7. Sabur Mollah, 2011. "Do emerging market firms follow different dividend policies?," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 28(2), pages 118-135, June.

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