dividend taxes and security prices the reaction of dividend-paying stocks to the jobs and growth tax...
TRANSCRIPT
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7/28/2019 Dividend Taxes and Security Prices the Reaction of Dividend-Paying Stocks to the Jobs and Growth Tax Relief Reconciliation Act of 2003
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Welcome to Our Presentation
Group 4:
Entrepreneurs
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7/28/2019 Dividend Taxes and Security Prices the Reaction of Dividend-Paying Stocks to the Jobs and Growth Tax Relief Reconciliation Act of 2003
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Topic of the Presentation
Dividend Taxes and
Security Prices: The Reaction of
Dividend-Paying Stocks to theJobs and Growth Tax Relief
Reconciliation Act of 2003
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Group Members
14092
1410014102
14103
14157
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Outline
The Act 50% reduction of tax on dividend income
No tax on dividend income
Reduction of tax from 38.6% to 15% on dividend income
Research Questions
Examine the relationship between dividend yield and share price reaction to the
announced reduction in dividend tax rates.
Examine the previously identified moderating effect of institutional ownership on the
relation between share price reaction and dividend yield.
Research Method
Use of Regression model to test the hypotheses
Results & Conclusion
Positive relationship between dividend yield and share price reaction to the Act
Level of Institutional Ownership has no impact when tax rates are decreasing.
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The Act
In May of 2003,Congress passed the Jobs and
Growth Tax Relied Reconciliation Act of 2003
which reduced the maximum individual tax rate
applicable to dividend income from 38.6% to15%, the lowest rate on dividend income in US
history.
5 months before the act is passed, the market
received some signals about what might be
included in the coming act
Analysis the affects of received information on
share prices and corporation share ownership
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Significant Events Preceding the act
Rumor of 50% reduction of the dividend taxDecember 26, 2002
Rumor of full elimination of dividend taxJanuary 6, 2003
Market learned that dividends would not besubject to full exclusion but at the rate of 15%
tax.
April 30, 2003
The bill providing for reduction in the dividendtax passed the House of RepresentativesMay 9, 2003
The bill the passed the Senate by (51-50) vote.May 15, 2003
The Act was passed by CongressMay 23, 2003
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Research Questions
First research question concerns with the
relationship between dividend yield and share
price reaction to the announced reduction individend tax rates.
Second research question examines the
moderating effect of institutional ownershipon the relation between share price reaction
and dividend yield.
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Research Questions
Different views and experts analysis:
Traditional view: Dividend tax penalizes
investors in dividend-paying firms and it
provides lower ATR.
Capitalization view: Dividend taxes are
capitalized into stock prices regardless of firms
actual dividend payouts.
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Research Questions
Ayers et al: stock prices reaction is positivelycorrelated with firm dividend yields andnegatively correlated with the degree ofinstitutional ownership of the firm.
Lightner et al: statistically significant negativerelationship between dividend yield and thechange in institutional ownership.
Dhaliwal et al: During when the dividend taxpenalty is relatively high, the cost of capital isnotably higher for high-dividend paying firms.
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Estimate the following regression model for
testing the hypothesis-
CARit=0+ 1 Eventt+ 2 Yieldi+ 3 INSTSHit+ 4
EventtYield i+ 5 YieldiINSTISHi+ 6
EventtYieldiINSTISHi+ kXki+ it
Research Method
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Research MethodWhere:
CAR(it): Cumulative abnormal return for sample firm i cumulatedover a 3-day prior beginning 1 day prior to the event date &ending 1 day after the event date.
Event(t): An indicate or equal to 1 if period t is the JGTRRA eventPeriod & 0 for the control periods surrounding JGTRRA.
Yield ( t): Common stock dividends divided by market value ofequity for firm i as December 31,2002
INSTISH(i): Percent of outstanding shares held by institutions forfirm i as of the end of the quarter prior to announcement.
X(ki): A vector of variables that control for firm attributes ,such
as firm size, profitability , book to market ratio ,risk &leverage that may be associated with stock returns duringthe sample period.
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Research Method
An event study methodology was used to investigatewhether the reduction in dividend tax ratesassociated with JGTRRA affected stock prices.
A standard market model to estimate daily abnormalreturns using a 3-day window beginning 1 day prior tothe event date & ending 1 day after the event date.
Within our presentation, we emphases on somespecific variables that we have deemed to be
relevant, i.e. EVENT x YIELD, EVENT x INSTSH x YIELD.
Moreover, we have analyzed three statisticallyarranged tables. They are:
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Research Method
Table-3. Cross-sectional OLS Regression ofCumulative Abnormal Returns onIndependent and Control Variables around
Key announcement dates leading up to theJGTRRA 2003.
Table-4. Cross-sectional OLS Regression ofCumulative Abnormal Returns onIndependent and Control Variables aroundMay 15 and 23 announcement dates.
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Research Method
Table 5. comparison of changes in
institutional ownership by yield quintiles.
We have reached at our decision by using
statistical tool correlation coefficient and
regression.
We compute each firms dividend yield by
dividing common stock dividends by the
firms market value
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Results
1. The relationship between dividend yield and
share price reaction to the announced
reduction in dividend tax rates.
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ResultsEvent Date Results Using Regression Model
December 25, 2002 (50%
Reduction of dividend tax)
EVENT * YIELD 0.092
January 6, 2003 (Elimination of
the dividend tax)
EVENT * YIELD 0.101
April 30, 2003 (Market learned
that There will not be full
exemption but 15% tax rate
will be applicable)
EVENT * YIELD Failed to find any significant
relation between yield and
abnormal return (EVENT *
YIELD). Results not reported.
May 9, 2003 (the bill passed
the house of representatives)
EVENT * YIELD Failed to find any significant
relation between yield and
abnormal return (EVENT *YIELD). Results not reported.
May 15, 2003 (the bill passed
the senate with 51-50 vote)
EVENT * YIELD .203
May 23 (the bill passed the
House of Congress)
EVENT * YIELD .141
Variable Estimated Coefficient
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Results
2. The moderating effect of institutional
ownership on the relation between share price
reaction and dividend yield.
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Results
Quintile Mean Yield(N) Changes InInstitutional
Ownership between
Quarters 3 and 4 of
2002
Changes InInstitutional
Ownership between
Quarters 1 and 2 of
2003
1 (Lowest) 0.007 -.004 0.01
2 0.017 -0.006 0.001
3 0.025 -0.006 0.007
4 0.035 -0.006 0.007
5 0.075 -0.01 0.01
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Conclusion
The is a role for dividend policy in influencingthe stock price reaction to announcement in
dividend tax changes
Level of institutional ownership has no impactwhen tax rates are decreasing, unlike the case
of rate increases
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Q&A