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Penalty or Benefit? The Effect of Dividend Taxes on Stock Valuation

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Innovative Mobile and Internet Services in Ubiquitous Computing (IMIS 2018)

Part of the book series: Advances in Intelligent Systems and Computing ((AISC,volume 773))

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Abstract

The extant literature has shown that dividends have positive valuation implications due to signaling and agency cost effects. However, under the tax systems of most countries, individual investors face a higher tax rate on dividend income than on capital gains. Therefore, individual investors pay a dividend tax penalty, which results in lower equity values. U.S Studies indicate that as the level of institutional ownership increases, the likelihood that a marginal investor is not a high-tax-rate individual increases. Consequently, the negative dividend tax penalty effect on the positive market response to dividend surprises should decrease. This study extends previous research to investigate the tax effect of dividends under Taiwan’s imputation tax system. We find that dividend tax penalty partially offsets the positive effects of dividends on equity values. However, this negative tax effect of dividends can be alleviated by the presence of a marginal investor who represents a tax-exempt institution.

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Notes

  1. 1.

    For example, for legal entities in Taiwan, the dividends received on their holdings in other companies are not included in taxable income. In the U.S, legal entities are allowed a 70%, 80%, or even 100% deduction for dividends received from other companies that they own.

  2. 2.

    Ayers et al. [2] and Li [3] utilize the highest individual marginal income tax rate as a starting point to conduct their theoretical analyses.

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Author information

Authors and Affiliations

  1. Department of Accounting and Information Systems, Asia University, Taichung, Taiwan

    Wen-hsin Huang & Mei-Hua Huang

  2. Department of Accounting, National Taiwan University, Taipei, Taiwan

    Suming Lin

Authors
  1. Wen-hsin Huang
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  2. Suming Lin
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  3. Mei-Hua Huang
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Corresponding author

Correspondence to Mei-Hua Huang .

Editor information

Editors and Affiliations

  1. Department of Information and Communication Engineering, Fukuoka Institute of Technology, Fukuoka, Japan

    Leonard Barolli

  2. Technical University of Catalonia, Barcelona, Spain

    Fatos Xhafa

  3. Department of Computer Science, COMSATS Institute of Information Technology, Islamabad, Pakistan

    Nadeem Javaid

  4. Rissho University, Tokyo, Japan

    Tomoya Enokido

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Huang, Wh., Lin, S., Huang, MH. (2019). Penalty or Benefit? The Effect of Dividend Taxes on Stock Valuation. In: Barolli, L., Xhafa, F., Javaid, N., Enokido, T. (eds) Innovative Mobile and Internet Services in Ubiquitous Computing. IMIS 2018. Advances in Intelligent Systems and Computing, vol 773. Springer, Cham. https://doi.org/10.1007/978-3-319-93554-6_83

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