Implicit Taxes in High Dividend Yield Stocks

Posted: 14 Sep 1998

See all articles by Merle Erickson

Merle Erickson

University of Chicago - Booth School of Business

Edward L. Maydew

University of North Carolina at Chapel Hill

Abstract

Implicit taxes reflect the extent (if any) to which tax-favored assets bear lower pretax returns than do tax-disfavored assets of similar risk. Prior research on implicit taxes has met with mixed results, particularly in equity securities, because of the difficulty in separating tax effects from effects caused by cross-sectional differences in risk. We avoid problems of risk by essentially comparing each security to itself before and after an unexpected change in the manner in which dividends are taxed to corporate investors. We find strong evidence of implicit taxes in preferred stocks. Extensive testing using the same event date indicates that no similar implicit tax effect exists in common stocks.

JEL Classification: H22, H25, G12, M41

Suggested Citation

Erickson, Merle and Maydew, Edward L., Implicit Taxes in High Dividend Yield Stocks. Available at SSRN: https://ssrn.com/abstract=125530

Merle Erickson (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-0716 (Phone)
773-702-0458 (Fax)

Edward L. Maydew

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

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