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Taxes, Market Valuation and Financial Policy
Abstract
IN A well-known series of papers Franco Modigliani and Merton Miller^ have out- lined a general framework for the analysis of the effects of capital structure and divi- dend policies on the valuation of the corpo- ration under uncertainty. What disagree- ment remains about their conclusions stems mainly from different beliefs about the effects of various market imperfections on their analysis.- Modigliani and Miller them- selves have dealt comprehensively with one such imperfection, namely the tax system as it affects corporations directly.^ However, while they have directed attention to the effects of the tax system as it relates to the taxation of corporate income, their papers are characterized by an ailmost total neglec; of the complementary aspect of the system, which is the taxation of individuals. It is the purpose of this paper to extend their analysis to incorporate the effects of those features of the personal tax structure which are relevant for the valuation of the corpo- ration. Two features of the personal tax struc- ture stand out in importance for the theor}' of valuation. First is the provision of the existing tax code which permits individuals as well as corporations to deduct interest
... The tests of this hypothesis are mostly based on Brennan (1970) after-tax capital asset pricing model (CAPM). Brennan's (1970) model indicates that risk-adjusted pretax returns should be positively correlated to dividend yields. ...
... The tests of this hypothesis are mostly based on Brennan (1970) after-tax capital asset pricing model (CAPM). Brennan's (1970) model indicates that risk-adjusted pretax returns should be positively correlated to dividend yields. However, empirical tests of the Brennan model are inconclusive. ...
... However, in the real world taxes exist and may have a significant influence on dividend policy and stock prices. For example, a theoretical model developed by Brennan (1970) indicates that the risk-adjusted pretax returns and dividend yields should be positively related. Yet, empirical evidence of the Brennan theoretical model is unconvincing. ...
... Merton (1973) has derived a version of the CAPM which assumes trading takes place continuously over time, ~nd that asset returns are distributed lognormally. Brennan (1970) and Litzenberger & Ramaswamy (1979) have considered models which include the effect of differential tax rates on capital gains and dividends. ...
... Because dividends are generally more heavily taxed than capital gains the question arises of whether an investor who 'tilts' his portfolio towards low yield securities is increasing or decreasing his expected after-tax return arises. Brennan (1970) and L.itzenberger & Ramaswamy (1979) argue that the higher a stock's dividend yield, the higher the pre-tax S.-Afr. Tydskr.Bedryfsl.1988, ...
The authors examine the validity of the CAPM for Johannesburg Stock Exchange (JSE) stocks. Additional effects, namely, dividend yield, size and liquidity are also considered using traditional tests. The results indicate that the one-parameter CAPM is well-specified for the JSE. The betas of gold shares, however, are found to be poor predictors of rand returns - but improve when viewed in dollar terms. None of the above-mentioned effects are found to be significant, however, a slight preference for high-yielding gold shares is documented. Explanations for these findings are offered and contrasted with results documented on the NYSE.
... Předpokládejme, že daňová sazba pro kapitálové zisky je nižší než běžná daňová sazba. Brennan (1970) vytvořil daňový model oceňování kapitálových aktiv (T-CAPM), který matematicky vyjádříme takto: Očekávaný výnos v modelu T-CAPM je funkcí dividendového výnosu z akcie; čím je vyšší tento dividendový výnos, tím vyšší musí být výnosová míra před zdaněním. Jestliže dividendový výnos se rovná tržnímu výnosu a i = 1,0, pak očekávaná výnosová míra z aktiva i se rovná očekávané výnosové míře z tržního portfolia. ...
... • Tax preference theory: For tax-related reasons, investors prefer retained earnings over the distribution of cash dividends. As a result of the tax advantage of capital gains, investors may prefer a low dividend payout as opposed to a high payout (Brennan, 1970). In Egypt taxes on dividends and capital gains were imposed only starting 2014, therefore this theory is not applicable in our study. ...
... They said that higher tax rate on personal income such as dividend than capital gain may lead to lower the value of share. Brennan (1970) and Litzenberger and Ramaswamy (1979) arrived at same conclusion with Farrar and Selwyn (1967). ...
The prime objective of this research is to investigate the impact of dividend policy on share price volatility in Colombo Stock Exchange (CSE). A sample of 81 listed non -financial firms from CSE in Sri Lanka is examined using panel data analysis for a five years period from 2013 to 2017. Dividend policy of the firms has been measured by dividend pay-out, dividend yield and dividend per share and which are explanatory variables of the study after controlling for firm size and financial leverage. According to the random effect regression analysis, only 25% of the movements in share prices are explained by the explanatory variables considered in this study. Dividend yield shows significant positive impact on share price volatility whereas dividend per share shows the significant negative impact on share price movements. Firm size illustrates significant negative influence on share price volatility by indicating large size of companies share price volatility is high. But, dividend pay-out and financial leverage are not significantly persuaded on share price volatility in this study. Therefore, it is concluded that dividend yield, dividend per share and firm size have significant impact on price volatility in Sri Lankan context and findings of the study are in line with the dividend relevance theory. Dividend policy can be considered as the protective mechanism to maintain share price volatility in order to enhance the shareholders wealth.
... This would not now be permitted within the European Union.119 Evidence supporting this view is provided byBond et al (2007), for example, based on a model ofBrennan (1970).120 For a discussion, seeGraetz and Warren (2016). ...
This chapter sets out and evaluates a number of possible reform options; we group options by four broad locations in which profit could be taxed. First, profit could in principle be taxed in the country of residence of the owners of the business. A second option is the country of residence of the parent company or business headquarters. A third option is the country where the business undertakes its functions and activities, or where its assets—defined broadly to include financial assets—are held. We refer to this location as ‘origin’. And finally, a business could be taxed in the location of its customers. We refer to this location as ‘destination’. Each of the activities taking place in these four locations might be thought to be necessary, but not sufficient, for the generation of profit, and therefore generate a nexus which would justify taxation. We evaluate specific options according to the five criteria set out in Chapter 2.
... This would not now be permitted within the European Union.119 Evidence supporting this view is provided byBond et al (2007), for example, based on a model ofBrennan (1970).120 For a discussion, seeGraetz and Warren (2016).Downloaded from https://academic.oup.com/book/39640 by guest on 26 November 2022 ...
This book undertakes a fundamental review of the existing international regime for taxing business profit. It steps back from the current political debates on how to combat profit shifting and how taxing rights over the profits of the digitalized economy should be allocated. Instead, it starts from first principles to ask how we should evaluate a tax on business profit—and whether there is any good rationale for such a tax in the first place. It then goes on to evaluate the existing regime and a number of alternatives that have been proposed. It argues that the existing regime is fundamentally flawed, and that there is a need for radical reform. The key conclusion from the analysis is that there would be significant gains from a reform that moved the regime towards taxing profit in the country in which a business made its sales to third parties. That conclusion informs two proposals that are put forward in detail and evaluated: the Residual Profit Allocation by Income (RPAI) and the Destination-based Cash Flow Tax (DBCFT). The book is authored by group of economists and lawyers—the Oxford International Tax Group, chaired by Michael Devereux. It draws insights from both economics and law—including economic theory, empirical evidence on the impact of taxes, and a detailed examination of practical issues of implementation—to assess the existing system and to consider fundamental reforms. This book will be useful to tax policy makers, tax professionals, academics, and anyone interested in tax policy.
... It predicts that dividends may serve as a mechanism to overcome the agency problem by reducing cash flow under management control. Reducing cash flow may also result in forcing them into capital markets more frequently (Jensen and Meckling, 1976;Rozeff, 1982;Easterbrook, 1984) Tax preference and tax clientele effect theory: Tax preference theory asserts that low dividend payout ratios lower the required rate of return, therefore investors prefer capital gains to dividends if capital gains are taxed at a lower rate (Brennon, 1970;Litzenberger and Ramaswamy, 1979). Tax clientele effect theory argue that differentials in tax rates between dividends and capital gains lead to different clienteles (Miller and Scholes, 1982). ...
... Rosenberg, Reid and Lanstein (1985), DeBondt and Thaler (1987) and many others have documented significant positive relation between returns and the Book-to-Price ratio (B/P). Brennan (1970) and Litzenberger and Ramaswamy (1979) show that Dividend Yield could be a priced factor. Banz (1981) and Reinganum (1981) document the size effect. ...
... The modern literature on dividend policy has been strongly dominated by economic modeling approaches, both in developing hypotheses and in empirical investigation of dividend policy. 4 Brennan (1970) provides an after-tax model of dividend valuation and the Capital Asset Pricing Model that other researchers use. Notably, Black and Scholes (1974) find no evidence of a dividend effect and Litzenberger and Ramaswamy (1979) find a significant effect. ...
The question of why individual investors want dividends is investigated by submitting a questionnaire to a Dutch consumer panel. The respondents indicate that they want dividends, partly because the transaction costs of cashing in dividends are lower than the transaction costs involved in selling shares. The results are inconsistent with the uncertainty resolution theory of Gordon (1961, 1962) and the agency theories of Jensen (1986) and Easterbrook (1984). In contrast, a very strong confirmation is found for the signaling theories of Bhattacharya (1979) and Miller and Rock (1985). The behavioral finance theory of Shefrin and Statman (1984) is not confirmed for cash dividends but is confirmed for stock dividends. Finally, our results indicate that individual investors do not tend to consume a large part of their dividends. This raises some doubt on the effectiveness of the elimination of dividend taxes in order to stimulate the economy.
... The firm has to operate in a bounded economic environment where taxes (See, Brennan, 1970;Kalay and Michaely, 1993;Elton and Gruber, 1970) are imposed, corporate laws are enforced and market dynamics dominate, no matter how big, wealthy and well organised the firm is. The firm has to adjust its corporate dividend policy according to the economic environment. ...
... Instead of a risk-free asset, investors then combine portfolios not correlated to the market, which have the lowest risk. Brennan (1970) contested another assumption -the non-existence of taxes. In his model he considered different tax rates for individual investors and even for income and capital gains. ...
This chapter is focused on building investment portfolios by using the Markowitz Portfolio Theory (MPT). Derivation based on the Capital Asset Pricing Model (CAPM) is used to calculate the weights of individual securities in portfolios. The calculated portfolios include a portfolio copying the benchmark made using the CAPM model, portfolio with low and high beta coefficients, and a random portfolio. Only stocks were selected for the examined sample from all the asset classes. Stocks in each portfolio are put together according to predefined criteria. All stocks were selected from Dow Jones Industrial Average (DJIA) index which serves as a benchmark, too. Portfolios were compared based on their risk and return profiles. The results of this work will provide general recommendations on the optimal approach to choose securities for an investor's portfolio.
... • teoria privind efectul impozitelor (Brennan, 1970)conform acesteia, ratele reduse de distribuire a dividendelor implică o rată a rentabilităţii cerută de investitori mai mică şi determină o creştere a valorii firmei pe piaţă. În contextul în care creşterile de capital sunt superioare distribuirilor în dividende, investitorul solicita ca indicatorul dividend/preţul acţiunii să fie net superior altor firme; 133 • teoria efectului clientelei (Elton şi Gruber, 1970) -este o ipoteză bazată pe ideea că un investitor (clientul) se va axa pe propriile preferinţe în materie de achiziţii/economii. ...
... In this regard, it notes that the goal of obtaining better estimates of the beta coefficient has helped to identify the critical issues inherent its estimation , thus correcting the errors in the regression phase [Miller-Scholes (1972), Roll (1977); Murgia (1989) ] or deriving the beta coefficient in function of company fundamentals that determine it (capital beta) [Beaver, Kettler and Scholes (1970)]. On the other hand, a second critical issue concerns the assumptions underlying the original formulation of the C.A.P.M., which is not supported by empirical evidence because there are certain inefficiencies in the market that would not be consistent with the restrictive assumptions of the model [Brennan (1970) ; Litner, (1971), Black (1972), Mayers, (1972), Lindenberg (1979); Mayshar, (1981)]. Some experts invoke, therefore, that the beta may not be sufficient to evaluate the variations of returns as it may not be the only component of risk that investor asks like remuneration. ...
The estimate of undivided and indivisible real estate shares, in relation to different building types represents, in practice application, a recurring underestimated by the professional appraisers. This problem requires finding a logical solution that can to rationalize the process the process of estimation of undivided shares, given that these shares are more difficult to sell and, consequently, there is a decrease of their market value. It follows that in this estimative case the problem can be lead, both in theoretical and practical terms, to assessment of specific real estate investment’s risk and how to convert the measure of risk into an expected return that can compensate it. In this framework, the proposed contribution aims to implement the Capital Asset Pricing Model with Penalized Spline Semiparametric Method in order to obtain an estimation algorithm that allows to rationalize the approach to the problem of estimation of undivided real estate shares using data easy to find.
... Dividend policy is one of the cornerstones of financial economics and an extensive literature has evolved since Miller and Modigliani's (1961) seminal work on the irrelevance of dividend policy. In the presence of taxes, a zero-dividend policy would be optimal (Farrar and Selwyn, 1967;Brennan, 1970). Yet, firms do pay dividends. ...
We investigate the role of CEO power and government monitoring on bank dividend policy for a sample of 109 European listed banks for the period 2005-2013. We employ three main proxies for CEO power: CEO ownership, CEO tenure, and unforced CEO turnover. We show that CEO power has a negative impact on dividend payout ratios and on performance, suggesting that entrenched CEOs do not have the incentive to increase payout ratios to discourage monitoring from minority shareholders. Stronger internal monitoring by board of directors, as proxied by larger ownership stakes of the board members, increases performance but decreases payout ratios. These findings are contrary to those from the entrenchment literature for non-financial firms. Government ownership and the presence of a government official on the board of directors of the bank, also reduces payout ratios, in line with the view that government is incentivized to favor the interest of bank creditors before the interest of minority shareholders. These results show that government regulators are mainly concerned about bank safety and this allows powerful CEOs to distribute low payouts at the expense of minority shareholders.
... Notwithstanding the dividend policy irrelevance theory of Modigliani and Miller, (1961); Litner, (1956) proposed that an increase in the level of dividends would increase stock price. Brennan, (1970) agreed that dividend policy will affect share price but inversely; with an increase in the level of dividend stock price will decrease. Financial analysts' view on dividend policy have always been converging on a roundup note that managers must consider the dividend policy which will lead to maximizing the shareholders' wealth and should not only concentrate on how much companies required for investment. ...
Highlights Dividend per share function is investigated for Nigeria. The dividend per share is positively influences by its own lag. The present study opens new insights. A b st r a ct Purpose: This study examines the variables determining dividend per share (DPS) in some selected companies listed on the Nigerian Stock Exchange (NSE). Methodology: The sample consists of 80 companies listed on the NSE as at 2012. The relevant explanatory variables were subjected to multiple regression analysis. Findings: Results revealed that current year earnings per share (EPSt) and previous year dividend per share (DPSt-1) were both positively significant at one per cent. Dividend pay-out ratio (PAYOUTt) was significant at five per cent. Both Profitability (PROFITt) and Investment (INVESTt) were significant at 10 per cent, but INVESTt was negatively significant. One may conclude that EPSt, DPSt-1 and PAYOUTt are the three major variables influencing the company's decision to increase or decrease dividend per share (DPSt) in the NSE. Recommendations: Managers should therefore monitor these variables in taking decisions for their companies.I. Introduction The importance of the stock exchange market in both developed and developing countries cannot be overemphasized especially in the area of corporate sector growth, which dictates the tone of any economic development. Stock markets all over the world are sensitive to business conditions. A specialized index is constructed to track performance of listed companies sector by sector to the extent that international investor can compare the performance of an index to other indices around the world. The annual performance of each company listed on the stock exchange is evaluated on daily basis. Investors are very particular about the market value of companies and also whether dividends are paid. Payment of dividend depends on the policy of the company in question. Such policy determines the amount of dividend payment and the amount retained for reinvesting in new projects. This policy is related to dividing the firm's earnings between payments to shareholders and reinvesting in new opportunities (Hashemijoo et al. 2012). Dividend policy has been one of the most significant topics in financial literature which gives it a considerable attention to unveil the implicit assumptions about how dividends are paid. The issue of dividend has been very volatile on the other financial policies of companies. A change in dividend policy, given the company's investment decision, may affect the share price of the company. Notwithstanding the dividend policy irrelevance theory of Modigliani and Miller, (1961); Litner, (1956) proposed that an increase in the level of dividends would increase stock price. Brennan, (1970) agreed that dividend policy will affect share price but inversely; with an increase in the level of dividend stock price will decrease. Financial analysts' view on dividend policy have always been converging on a roundup note that managers must consider the dividend policy which will lead to maximizing the shareholders' wealth and should not only concentrate on how much companies required for investment. Managers must consider the impact of dividend policy on share price, investment and capital structure. Such eventual decision must be financially holistic. All these have stage-managed dividend policy to be a popular research topic amongst financial researchers more than about six decades ago. This paper examines the determinants of dividend per share of eighty selected companies listed in the Nigerian Stock Exchange (NSE) based on 2012 financial statements.
... Instead of a risk-free asset, investors then combine portfolios not correlated to the market, which have the lowest risk. Brennan (1970) contested another assumption -the non-existence of taxes. In his model he considered diff erent tax rates for individual investors and even for income and capital gains. ...
ŠIRŮČEK MARTIN, KŘEN LUKÁŠ. 2015. Application of Markowitz Portfolio Theory by Building Optimal Portfolio on the US Stock Market. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 63(4): 1375–1386. This paper is focused on building investment portfolios by using the Markowitz Portfolio Theory (MPT). Derivation based on the Capital Asset Pricing Model (CAPM) is used to calculate the weights of individual securities in portfolios. The calculated portfolios include a portfolio copying the benchmark made using the CAPM model, portfolio with low and high beta coeffi cients, and a random portfolio. Only stocks were selected for the examined sample from all the asset classes. Stocks in each portfolio are put together according to predefi ned criteria. All stocks were selected from Dow Jones Industrial Average (DJIA) index which serves as a benchmark, too. Portfolios were compared based on their risk and return profi les. The results of this work will provide general recommendations on the optimal approach to choose securities for an investor's portfolio.
... Bu nedenle temettüdeki azalış kurumsal hissedarlar için istenmeyen bir olay ve temettüdeki artış kurumsal hissedarlar için istenen bir olay olarak ortaya çıkmaktadır. Bazı çalışmalar, temettünün firma değeri üzerindeki etkilerini Brennan'ın (1970) vergi sonrası temettü değerlemesi modelini kullanarak test etmiştir. Litzenberber ve Ramaswamy (1982) temettünün firma değeri üzerinde etkisi olduğu sonucuna ulaşmışken, Black ve Scholes (1974) aynı sonuca varamamıştır. ...
Çalışmada Türkiye sermaye piyasasında nakit temettü bilgisinin hisse senedi getirisi üzerinde önemli bir etkisi olup olmadığı, açıklama etkisi aracılığıyla ve 2003-2007 yılları arasındaki beş yıllık dönemde İstanbul Menkul Kıymetler Borsası’nda işlem gören 83 şirketin 321 adet nakit temettü açıklaması ile ilgili fiyat verileri kullanılarak regresyon yöntemiyle test edilmiştir. Elde edilen bulgular çerçevesinde üç önemli sonuca ulaşılmıştır. Birincisi, nakit temettünün açıklanması sonrasında hisse başına nakit temettü oranı ile kümülatif normalüstü getiri arasında istatistiksel olarak anlamlı negatif bir ilişki vardır. Hisse başına yüksek nakit temettü açıklayan hissenin normalüstü değer kaybı, hisse başına düşük nakit temettü açıklayan hissenin fiyatına göre daha fazladır. Dolayısıyla, nakit temettü fiyatı etkileyebilecek önemli bir bilgidir. İkinci olarak, fiyatın bilgiye uyarlanma süreci açıklamanın yapıldığı gün başlamakta ve en az 15 gün devam etmektedir. Nakit temettü açıklanmasından sonra en güçlü etki ilk üç günde olmaktadır. Son olarak, nakit temettü açıklaması öncesinde anlamlı bir fiyat hareketinin olmaması nedeniyle, fiyatı etkileyebilecek ve önemli bir bilgi olan nakit temettü kararının şirket içinden piyasaya sızmadığı sonucuna varılması mümkündür.
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Information Content of Cash Dividend: An Empirical Study on Istanbul Stock Exchange
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This study investigates the information content of the cash dividend in the Turkish capital markets by using regression analysis. Data used in the study consist of 321 cash dividend announcements and relevant prices of 83 companies traded in Istanbul Stock Exchange during the 2003-2007 period. The main findings of the study are as follows: First, there is a significant negative relationship between cash dividend and abnormal return after the announcement. The announcement of a higher cash dividend per share results in a significant higher negative abnormal return and the announcement of a lower cash dividend per share results in a significant lower negative abnormal return. Therefore, cash dividend has information content. Second, the adjustment of prices to new information starts on the announcement day, and it continues at least 15 days. The most significant price adjustment takes place in the first three days. Finally, there is no significant relationship between cash dividend and abnormal return prior to the announcement day which implies that there is no significant information leakage prior to the information becoming publicly available.
... Some studies tested the effect of dividend on value of the firm based on after tax dividends valuation model of Brennan (1970). Black and Scholes (1974) found no evidence of the dividend has an affect on the value of a firm, whereas Litzenberber and Ramaswamy (1982) found that dividend has an effect on the value of a firm. ...
This study analyses the announcement effect of cash dividends on share prices in the Turkish capital markets. It is investigated whether cash dividend announcements result in an abnormal return around the announcement day in Istanbul Stock Exchange. The abnormal returns which are calculated using the market adjusted model, between t-5 and t+15 days event windows are used to test this effect. In the regression, a dividend per share is regressed on the abnormal returns in the event windows from t-5 to t+15 days.
The study uses data of 330 events for 88 companies from 2003 to 2007. The main findings of the study are; first, there is a significant negative relationship between cash dividends and abnormal returns after the announcement. The announcement of a higher cash dividend per share results in significant a higher negative abnormal return and the announcement of a lower cash dividend per share results in significant a lower negative abnormal return. In the case of only cash dividends announcements, the announcement of a cash dividend itself has a significant effect on share prices. In the event study analysis, only the announcement of cash dividends decrease results in a significant abnormal positive return in the event windows after the announcement day. Second, the adjustment of prices to new information starts on the announcement day and it continues at least 15 days. The most significant price adjustment takes place in the first three days. Third, there is no significant relationship between cash dividends and abnormal returns prior to the announcement day which implies that there is no significant information leakage prior to the information becoming publicly available.
The observed negative relationship between cash dividends and abnormal share returns after the announcement on the Istanbul Stock Exchange can be explained by the tax clientele effect. In Turkey capital gains are taxed at lower than the dividend yields. Shareholders therefore prefer earnings to be retained rather than paid out as a dividend. Since the results document that there is no information leakage prior to the announcement day, the regulation and supervision of the capital markets in Turkey can be said to be effective and efficient in preventing insider trading in relation to cash dividends.
... In fact, and in an imperfect capital market, many researchers consider that imperfections can make dividend policy relevant. These anomalies are fiscal (see Brennan, 1970; Elton et Gruber, 1970; Poterba et Summers (1984); Hamon et Jacquillat, 1992; etc.), informational (see Bhattacharya, 1979, 1980; John et Williams, 1985; Miller et Rock, 1985; Rozeff, 1982; Easterbrook, 1984; Jensen, 1986; etc.) and behavioral (see Shefrin et Statman, 1984). The latter, unlike other imperfections, has not been greatly used for resolving the « dividend puzzle ». ...
This article investigates the impact that prevailing investor demand for dividend payers and financial firm's characteristics have on the probability of starting or continuing to pay dividends. To test this prediction, we use probit regressions on panel data. The major finding that emerges from our analyses is: in large companies characterized by high profitability and low debt levels, investors' demand for dividend payers has a positive and significant impact on the probability that a manager will decide to pay positive dividends.
... The relation between imputation and an investor's required return is one component within the broader issue of how tax effects manifest in asset prices and returns. This topic has been widely studied, including how investor (personal) taxes and corporate taxes interact to influence investor returns, and the associated implications for cost of capital and capital structure, e.g. Brennan (1970); Miller (1977). The basic concept is that tax drives a 'wedge' between the pre-tax income that a company generates, and the post-tax income that an investor receives (King and Fullerton, 1983). ...
We examine the implications of the imputation system for stock prices and returns, cost of capital, project evaluation, capital structure, payout policy and investor portfolios. We also discuss potential impacts if the imputation system was dismantled or adjusted, perhaps in conjunction with a reduction in the corporate tax rate. A key theme is that the financial effects of imputation are often contentious. Most notably, the impact of imputation credits on share prices and cost of capital is subject to much debate: the notion that imputation is not priced is an extreme position, and an unreliable basis for policy formulation. More attention should be afforded to how imputation influences the behaviour of investors and companies. In this respect, the incentive that imputation provides for increasing dividend payouts is one of its clearest effects; and a key benefit through enhancing discipline in the use of capital. The effects of any removal of imputation are likely to be felt most strongly among smaller, domestic companies.
... A lot of dividend literature has proposed a host of explanations to it. Such as: agency costs theory (Jensen and Meckling, 1976; Rozeff, 1982), signaling hypothesis (Lintner, 1956; Miller and Modigliani, 1961), " birdin-the-hand " hypothesis (Miller and Modigliani, 1961; Bhattacharya, 1979), tax client effect theory (Brennan, 1970), and catering theory of dividends (Baker and Wurgler, 2004a, 2004b).In general, the literature focuses ...
Employing 1056 A-share listed companies in Shanghai and Shenzhen Stock Exchanges from 2001 to 2007, we analyse empirically the influence of financial characteristics and corporate governance on propensity to pay cash dividends of companies. The result shows that in the related indexes of the financial characteristics of companies, the company size, cash flow, asset liquidity, profitability as well as whether cash dividends are paid in the previous year are positively correlated with propensity to pay cash dividends of companies. Investment opportunity and debt ratio are negatively correlated with the propensity to pay cash dividends of companies. Growth has uncertain influence on the propensity to pay cash dividends. In the corporate governance characteristics, existence of controlling shareholders, stateowned shareholder as the largest shareholder, the size of the board of directors, top-management compensation and listing factors in other markets are positively correlated with the propensity to pay cash dividends of companies. Tradable share ratio and CEO duality factor are negatively correlated with the propensity to pay cash dividends of companies. Independent director factor has uncertain influence on the propensity to pay cash dividends of companies. In general, financial characteristics shows that Chinese listed companies have the capability to pay cash dividends, but the corporate governance factors have negative influence on the cash dividend payment of listed companies.
Key words: The propensity to pay cash dividends; The company factor; Financial characteristics; Corporate governance
... In a situation where the dividend amount is taxed higher than the capital gains, investors in different tax brackets will want another payout policies. Also, investors with high marginal tax rate will prefer stocks with low payout ratio citerus paribus (Brennan, 1970). But Kalay in his article says that this fact has no concrete argument, since many researchers have done a lot of studies and no result has shown that, those who earn high will prefer stocks that have a low dividend yield over the high ones (Kalay, 1982). ...
... Considerando que, no Brasil, não há tributação de dividendos desde 1996, a insignificância da diferença dos retornos anormais entre os grupos com dividend yield diferentes poderia ser explicadas pela teoria de Brennan (1970), que justifica a relevância do dividend yield para o retorno das ações apenas com o efeito fiscal. ...
O trabalho teve como objetivo analisar a relacao entre o dividend yield e o retorno anormal acumulado no periodo pos-pagamento de dividendos, considerando instabilidade economica. Utilizou-se metodologia similar a Novis Neto e Saito (2003) e Kuronuma et al. (2004). Os resultados indicam que a diferenca dos retornos anormais acumulados do grupo com alto dividend yield para o grupo com baixo foi estatisticamente insignificante para o periodo analisado, o que vai contra os resultados encontrados anteriormente. O trabalho sugere que a relevância do dividend yield para o retorno das acoes nao pode ser explicado unicamente pelo efeito fiscal.
This paper employs an extended Miller model to analyze capital structure decisions of individual firms in a two-country setting. Miller equilibria are generally not consistent with an international equilibrium if the tax subsidy of debt differs across countries. The most obvious reason for differential tax subsidies is differences between national corporate tax rates. We also identify differential tax subsidies of debt if inflation rates differ across countries. For both cases we examine the adjustment process from national equilibria to an international equilibrium without and with barriers to international investment. We derive the relationship between the equilibrium yields on debt and equity in the two countries and discuss the Fisher hypothesis that real returns do not depend upon inflation in a two-country Miller world. According to Miller's theory developed in his paper 'Debt and Taxes' (1977), the price of debt should reflect the tax rate of the marginal investor owning corporate debt. In equilibrium this tax rate will be equal to the corporate tax rate and hence the tax advantage of debt due to deductible interest payments is offset by the income tax on interest income on a personal level. In this model the tax on equity income is assumed to be zero and there exist tax-exempt municipal bonds. Building on the seminal work of Miller, DeAngelo and Masulis (1980b) derived a relationship between the prices of debt and equity which does not depend on the existence of tax-exempt bonds and which also allows for a personal income tax on equity income. This pricing formula is relevant if capital gains are taxed at a lower rate than ordinary income. Since this form of taxation is practised in most countries, the DeAngelo and Masulis model should, in general, describe national equilibria. Not much effort seems to have been made to study the effect of foreign * We have received valuable comments from Lemma Senbet, Rene Stulz, an anonymous referee and
La présente recherche étudie la demande des actionnaires pour le dividende au sein des entreprises familiales cotées françaises. Un échantillon de 152 entreprises familiales a été interrogé entre 2000 et 2015 dans le but de comprendre la demande variable dans le temps pour le dividende. Les résultats démontrent que les dirigeants familiaux sont alertes à cette demande en réagissant notamment à la variation de la "prime de dividende". Ils initient - et maintiennent plus tard - une distribution en fonction de cette prime lorsque cette dernière avantage les entreprises distributrices au détriment des entreprises non distributrices sur les marchés. Les tests effectués démontrent néanmoins que cette demande (prime) n'est pas pris en compte dans les politiques de dividendes des entreprises familiales nouvellement cotées.
We investigate the relation between tax burdens and mutual fund performance from both a theoretical and an empirical perspective. The theoretical model introduces heterogeneous tax clienteles in an environment with decreasing returns to scale and shows that the equilibrium performance of mutual funds depends on the size of the tax clienteles. Our empirical results show that the performance of U.S. equity mutual funds is related to their tax burdens. We find that tax‐efficient funds exhibit not only superior after‐tax performance, but also superior before‐tax performance due to lower trading costs, favorable style exposures, and better selectivity. This article is protected by copyright. All rights reserved
This thesis reports new evidence of a liquidity effect from money supply changes. From evidence, the money supply increases proposed by Friedman (1969) first lead to interest rate declines and inflation increases. Yet the proposition that money supply increase leads to liquidity surge and credit expansion in the banking sector – has not yet received unanimous empirical support.
Monetary transmission mechanism is more and more turning to the credit channel to trace how money affects prices. That money is endogenously determined as in the writings of post-Keynesian (PK) economists, will be examined in this thesis by applying a 3-equations model. The empirical tests of the theories are conducted using quarterly data over 1960 and 2011 for the G-7 countries: Canada, France, Germany, Italy, Japan, the United Kingdom (UK) and the United States (US). These tests are conducted to determine whether (1) money is endogenous (bidirectional) or exogenous (unidirectional), (2) money supply causes liquidity, and (3) liquidity causes share price to change. The empirical tests are conducted after the usual statistical tests (unit root,
iv
Granger causality, Johansen cointegration tests and VECM) are done on whether the data are stationary and cointegrated.
The results reported in this thesis are: i) bidirectional causality exists between GDP and money supply suggesting that money is endogenous; ii) there is a difference between long-term and short-term causality – as in the cases of Canada, Italy, Japan and the US. In contrast, France’s and Germany’s monetary policies appear to be in accordance with the monetarist view; iii) liquidity is found to be a significant variable in most cases except Canada 2 (in sub-period 1991:1 to 2007:1) and Italy; and iv) for most G-7 countries, there is a relationship between money supply and share returns.
Finally, the findings using the panel data estimation method show that there is a positive relationship between money supply growth and share returns: it is negative between share returns and money supply growth, due to central bank changing interest rates to curb inflation. In this context, there is a bidirectional positive relation between GDP growth and money supply growth, which supports the PK theory of endogenous money. Thus, the money-to-share-price-returns relation is founded on money being endogenous. The findings of the thesis provides a link between money supply, liquidity and the real economy, unlike the more narrower-focused asset pricing theories that purport to explain asset prices as determined by just the financial factors.
Directors’ personal attributes have significant impacts on governance effectiveness. We study whether directors’ accounting expertise affects corporate financial policy and investigate dividend in specific. We construct a dataset of audit committee directors’ accounting expertise for Standard & Poor 500 firms from 2005 to 2012. We first verify directors’ monitoring roles by showing that firms with accounting expert sitting on their audit committees demonstrate stronger accounting conservatism. In our main tests, we find that these firms maintain lower dividend payment level, which are less sensitive to earnings volatility. This suggests directors’ advisory roles in financial policy. We further show that our accounting expertise cannot be subsumed by management ability. In additional test, we further examine the baseline results conditional on analyst forecast error. Our findings highlight the importance of directors’ professional expertise in fulfilling their governance roles.
The main aim of this thesis is to analyze the behaviour of stock price on ex-dividend day in London Stock Exchange and New York Stock Exchange and draw a conclusion about the market efficiency based.
Dividends represent the primary means by which invested capital is returned to common stockholders. In this article we summarize the development of academic thinking on dividend policy, focusing on three primary perspectives: (a) the effect of dividend policy on common stock value and firm performance, (b) the determinants of dividend policy, and (c) macroeconomic trends in the propensity of firms to pay dividends.
A command economy is one in which the coordination of economic activity, essential to the viability and functioning of a complex social economy, is undertaken through administrative means — commands, directives, targets and regulations — rather than by a market mechanism. A complex social economy is one involving multiple significant interdependencies among economic agents, including significant division of labour and exchange among production units, rendering the viability of any unit dependent on proper coordination with, and functioning of, many others.
This case study on higher secondary education board of Nepal examines qualitatively human
resource management and development practices undertaken to manage and develop teachers
serving in the schools under HSEB in reference and against the stated vision, mission and
objectives of higher secondary education board of Nepal. An assessment of HSEB goals, HRM
practices undertaken by the board and universally accepted significance of HRM perspectives
were used as main research strategies to address the research question stated here: How
does HSEB Nepal address teaching faculty management and development issues in an endeavor
to address quality educational outcomes as envisioned in its policy documents? The analysis
of statistical data from the HSEB office publications, electronic media, and qualitative
information, and research participants' opinions showed that integrating sustainable HRM
practices in line with other functions of HSEB was crucial for attaining academic objectives
measurably.
IntroductionTheories Before IrrelevanceMM's Dividend IrrelevanceThe Impact of Market ImperfectionsRecent Challenges to IrrelevanceConclusions
About the Authors
to C Corps that are taxed at the corporate and personal levels, pass-throughs only pay personal taxes. Since the interest paid on debt lowers corporate taxes, a pass-through will ceteris paribus have a tax disadvantage when issuing debt compared to a C Corp. The tax differences between pass-throughs and C Corps lead to research questions governing pass-throughs such as: What will be the role of personal taxes in determining the amount of debt issued by a pass-through? What rules of thumbs might we offer to pass-through executives when making their debt-equity choice? Can we say anything about the role of market risk in the decision-making process for pass-through executives? How much debt should a pass-through issue compared to a C Corp? These questions are of considerable important and interest to both capital structure researchers who seek to explain the capital structure choice and practitioners who are charged with choosing the capital structure for companies. In this paper, we will supply answers to all of these questions. Before we can answer the above-mentioned questions, we need an adequate model. Discovering such a model is problematic for owner-managed enterprises as characterized by pass-throughs. Henrekson and Sanandaji (2011) point out that economic models of capital taxation have been inadequately adapted to owner-managed enterprises. In their review of the capital structure literature, Graham and Leary (2011) argue that researchers have explained only part of the observed behavior. They add that
In this study, I investigate lead-lag relationships among Asia-Pacific country stock returns. Taking the GARCH effects into account, I estimate a prediction model, and find that lagged Singapore returns exhibit the strongest predictive ability for the returns of Asia-Pacific countries. Estimating this model, I find that lagged Singapore returns exhibit the strongest predictive ability for the returns of Asia-Pacific countries. The Asia-Pacific stock markets react with a delay of information contained in lagged Singapore returns about their fundamentals, and that information diffuses gradually across Asia-Pacific stock markets. Finally, using the MSPE-adjusted statistic, I provide out-of-sample evidence to examine the consistency of the predictive power of lagged Singapore returns.
We present evidence of two systematic market risk implications associated with core earnings news implicit in dividend change announcements: (1) a decline in firm-market correlation intensity, consistent with reduced investor reliance on overall market movements to value shares, and (2) a downward shift in standard deviation of returns, consistent with increased core earnings information precision. Decoupling these two covariance component risk effects is important because they can offset one another at the firm level, masking unique market influences on total systematic risk. Each is influenced by the information environment in different ways and each is shown to incrementally explain returns in a CAPM-consistent manner.This article is protected by copyright. All rights reserved
Purpose
This study aims to investigate the behaviour of pay‐out policy of Dhaka Stock Exchange (DSE) listed firms preceding and following financial crisis to see whether dividend policy appears as significant measure to protect the general shareholders' interest following the crisis in 1997‐1998.
Design/methodology/approach
Ordinary least square models are tested on DSE data preceding (1988‐1997) and following the financial crisis (1999‐2003), on which no other study has been conducted yet.
Findings
The empirical results fail to trace noticeable improvements in pay‐out policy following the market crisis.
Research limitations/implications
Dividend policy does not appear as a significant measure to protect the shareholders' interest in the emerging market of Bangladesh and regulatory reforms following the financial crisis in 1997‐1998 appears as ineffective in Bangladesh.
Originality/value
The unique features of this study are that it is the first study of this kind in the stock market of Bangladesh and the data are captured preceding and following the financial crisis in 1997‐1998.
The vast quantity of finance literature dealing with Capital Market Theory on the New York Stock Exchange (NYSE) is evidence of the demand for research in this area. Until very recently, almost no research In this area has been conducted on smaller markets like the Johannesburg Stock Exchange (JSE). In this paper the evolution of Capital Market Theory will be reviewed, and where possible recent findings on the JSE will be contrasted to the well-established findings documented on the NYSE.
We examine the dividend policy of a sample of companies from eight emerging markets, and compare them to a sample of 99 US companies. The comparison is motivated by the observation that much of dividend policy theory is implicitly based on a capital market perspective. This perspective assumes arms length financing and generates dividend policy implications from models of signalling and information asymmetries. In contrast, financial systems in emerging markets tend to be more bankoriented while firms tend to be more closely held. Nevertheless, our results indicate that emerging market firms exhibit similar dividend behaviour to firms in the US, in the sense that they are affected by profitability, the amount of debt, and the market to book ratio. However, the empirical dividend policy equations are structurally different, indicating different sensitivities to these financial variables. Additionally, these emerging market firms seem to be more affected by their asset mix, that is the proportion of long term to total assets. This seems to be due to their greater reliance on bank debt. Overall, country factors are as important in dividend policies as Booth et al (2001) found them to be in capital structure decisions. What exactly are Acountry @ factors remains to be determined.
Miller ha examinado, en su forma magistral habitual, la validez y el funcionamiento del teorema de MM bajo condiciones de mercado perfecto y sin impuestos. Parece que hay poco que añadir al tema, especialmente desde que, a estas alturas, se han aportado innumerables demostraciones alternativas del teorema. Consecuentemente, tras decir unas pocas palabras sobre sus aspectos más íntimos, me gustaría volver a algunas cuestiones que todavía están pendientes �y que probablemente lo estarán durante mucho tiempo: ¿cómo deberían ser modificadas las proposiciones MM en presencia de impuestos? y ¿cómo responden a la hora de dar cuenta del comportamiento observado?
Purpose
– The positive relationship between dividend yield and risk-adjusted return, which is called the dividend yield effect, is well documented in the US market. Yet, the drivers of the yield effect are unclear. Some argue this evidence is consistent with the prediction that the investor-level tax burden is capitalized in stock prices, also known as the tax capitalization hypothesis. Still others contend that nontax omitted factors drive the yield effect. The purpose of this paper is to contribute to the debate by exploring if the yield effect occurs in Hong Kong market where no taxes exist on either dividend income or capital gain.
Design/methodology/approach
– The authors use two main approaches to detect the dividend yield effect. The first approach groups stocks into portfolios based on dividend yields and tests for the presence of a yield effect at the portfolio level. The second approach employs the Fama-MacBeth methodology at the firm level and tests if a yield effect is existent after controlling for firm characteristics known to explain stock returns.
Findings
– The paper documents a robust dividend yield effect in the Hong Kong market and suggests that nontax reasons help to explain the yield effect.
Originality/value
– Tax capitalization is a long-standing question in financial economics and the research evidence is mixed. The findings do not completely rule out the tax capitalization hypothesis. The main contribution is to illustrate the difficulty of conducting a powerful test of this hypothesis in practice and to urge caution in interpreting the dividend yield effect as evidence in support of this hypothesis.
This work analyzes whether the relationship between risk and returns predicted by the Capital Asset Pricing Model (CAPM) is valid in the Brazilian stock market. The analysis is based on discrete wavelet decomposition on different time scales. This technique allows to analyze the relationship between different time horizons, since the short-term ones (2 to 4 days) up to the long-term ones (64 to 128 days). The results indicate that there is a negative or null relationship between systemic risk and returns for Brazil from 2004 to 2007. As the average excess return of a market portfolio in relation to a risk-free asset during that period was positive, it would be expected this relationship to be positive. That is, higher systematic risk should result in higher excess returns, which did not occur. Therefore, during that period, appropriate compensation for systemic risk was not observed in the Brazilian market. The scales that proved to be most significant to the risk-return relation were the first three, which corresponded to short-term time horizons. When treating differently, year-by-year, and consequently separating positive and negative premiums, some relevance is found, during some years, in the risk/return relation predicted by the CAPM. However, this pattern did not persist throughout the years. Therefore, there is not any evidence strong enough confirming that the asset pricing follows the model.
The paper considers the nature of theoretical frameworks as they are predicated by their paradigm assumptions. We argue that although a paradigm shift may occur as the refutation of a prevailing paradigm, it is at least as likely to occur as the recognition that patterns of understanding may be structured more readily around an alternative set of key-note assumptions, a view that we support with examples of paradigm shifts as they have occurred in the physical sciences. In the context of these considerations, the paper assesses the cost of capital paradigm of corporate financial theory, its contribution to development and understanding, as well as the case for dissatisfaction. The case is presented for an alternative paradigm of key-note assumptions about (i) reputations based on past performance and (ii) commitment and trust relationships, for corporate financial management, by which both theory and field-study investigations might continue to be stimulated and developed.
This study investigates the effect of differential tax treatment between life and property-liability insurers on their common stock investments. The empirical methodology is based on an after-tax mean-variance model which predicts life insurers prefer higher dividend yields than property-liability insurers at any systematic risk level. After controlling for regulation, liquidity, and risk effects, test results show that each group of insurers forms a distinct tax-induced dividend clientele.
Tax planners often choose debt over equity financing. As this has led to increased corporate debt financing, many countries have introduced thin capitalization rules to secure their tax revenues. In a general capital structure model we analyze if thin capitalization rules affect dividend and financing decisions, and whether they can partially explain why corporations receive both debt and equity capital. We model the Belgian, German and Italian rules as examples. We find that the so-called Miller equilibrium and definite financing effects depend significantly on the underlying tax system. Further, our results are useful for the treasury to decide what thin capitalization type to implement.