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ABSTRACT

Prior research regarding company payout of dividends has been somewhat elusive and at times contradictory. Some extant studies find that when dividend tax rates are low, investors demand and receive greater dividend payouts. Other studies contradict that notion.

This study attempts to expand upon the two notions of distinguishing: 1. high dividend tax rates from low dividend tax rates, and 2. high growth firms from low growth firms in an attempt to address what impact each of these has on dividend policies of firms, and, ultimately the stock price of a firm.

Findings suggest that for firms paying dividends, during low dividend tax rate periods the percentage increase in dividend payments is more than double the percentage increase during high dividend tax rate periods. Also, low growth firms' percentage increase in dividend payments is greater than the percentage increase for high growth firms over the study period. From a stock price impact perspective, whether the firm is high growth or low growth, and whether the dividend tax rate is relatively high or low, all dividend paying firms studied show a positive stock price effect of dividend payments, with the greatest positive intensity occurring in the low dividend tax rate time periods, and for high growth firms.

Keywords: Tax Relief, Dividends, Stock Prices, Job Growth

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), the third largest tax cut in U.S. history. One of the many provisions of this act affected the tax rate on corporate dividends. Prior to the JGTRRA, dividends were taxed at the individual's income tax rate, with the highest bracket set at 35%. Beginning in 2003 the qualified dividend rate was lowered to 15%.

Extant research indicates that firms with higher dividend payouts have higher returns, which in turn positively affect stock prices [Gadarowski, Meric, Welsh, and Meric (2007), Masum (2014), Lew (2015)]. The dividend tax rate, and firm growth issues might interact with each other making it a complicated issue to determine if a dividend tax reduction has implications on how dividend-seeking investors view a firm and the resulting stock price of that firm.

The purpose of this study is to assess the...

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