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Do Investors Ignore Dividend Taxation? A Reexamination of the Citizens Utilities Case

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  • Hubbard, Jeff
  • Michaely, Roni

Abstract

Citizens Utilities Company (CU), Stamford, CT, has two classes of common stock, one paying cash dividends and one paying stock dividends. Unless CU shareholders ignore dividend taxation, the price of the cash dividend shares should increase relative to the stock dividend shares after the 1986 tax change. Contrary to this hypothesis, we find that the relative valuation of these two classes of shares was not permanently affected by the tax change. We do observe a pricing change around the time of the tax reform, but the effect is only temporary—the relative valuation before the tax change (1982–1984) and after (1987–1989) is almost equal. Two possible explanations for the observed valuation of the two stocks are clientele effects and differences in liquidity. We find that neither of these explanations can account for the relative pricing of the shares.

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  • Hubbard, Jeff & Michaely, Roni, 1997. "Do Investors Ignore Dividend Taxation? A Reexamination of the Citizens Utilities Case," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(1), pages 117-135, March.
    • Handle: RePEc:cup:jfinqa:v:32:y:1997:i:01:p:117-135_00
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    Cited by:

    1. Adelegan, Olatundun, 2006. "Effects of taxes financing decisions and firm value in Nigeria," Proceedings of the German Development Economics Conference, Berlin 2006 1, Verein für Socialpolitik, Research Committee Development Economics.
    2. repec:dau:papers:123456789/15219 is not listed on IDEAS
    3. Margaret Lamb & Andrew Lymer, 1999. "Taxation research in an accounting context: future prospects and interdisciplinary perspectives," European Accounting Review, Taylor & Francis Journals, vol. 8(4), pages 749-776.
    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. Berzins, Janis & Bøhren, Øyvind & Stacescu, Bogdan, 2019. "Dividends and taxes: The moderating role of agency conflicts," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 583-604.
    6. David, Thomas & Ginglinger, Edith, 2016. "When cutting dividends is not bad news: The case of optional stock dividends," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 174-191.
    7. Hameed, Allaudeen & Xie, Jing, 2019. "Preference for dividends and return comovement," Journal of Financial Economics, Elsevier, vol. 132(1), pages 103-125.
    8. Xiaoqiao Wang & Jing Xie & Bohui Zhang & Xiaofeng Zhao, 2024. "Unraveling the Dividend Puzzle: A Field Experiment," Working Papers 202406, University of Macau, Faculty of Business Administration.
    9. Odegaard, Bernt Arne, 2007. "Price differences between equity classes. Corporate control, foreign ownership or liquidity?," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3621-3645, December.
    10. Andriosopoulos, Dimitris & Hoque, Hafiz, 2013. "The determinants of share repurchases in Europe," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 65-76.
    11. Les Coleman, 2010. "The price gold shareholders place on market risks," Applied Financial Economics, Taylor & Francis Journals, vol. 20(10), pages 795-802.

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