Policy Documents

The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study

Alan J. Auerbach and Kevin A. Hassett –
June 1, 2005

The "Jobs and Growth Tax Relief Act of 2003" (JGTRA03) contained a number of significant tax provisions, but the most noteworthy may have been the reduction in dividend tax rates. The political
debate over the dividend tax reductions of 2003 took a number of surprising twists and turns.
Accordingly, it is likely that the views of market participants concerning the probability of
significant dividend tax reduction fluctuated significantly during 2003. In this paper, we use this fact
to estimate the effects of dividend tax policy on firm value. We find that firms with higher dividend
yields benefited more than other dividend paying firms, a result that, in itself, is consistent with both
new and traditional views of dividend taxation. But further evidence points toward the new view and
away from the traditional view. We also find that non-dividend-paying firms experienced larger
abnormal returns than other firms as the result of the dividend tax cut, and that a similar bonus
accrued to firms likely to issue new shares, two results that may appear surprising at first but are
consistent with the theory developed in the paper.