Welcome to Our Presentation

Group 4: Entrepreneurs

Topic of the Presentation Dividend Taxes and Security Prices: The Reaction of Dividend-Paying Stocks to the Jobs and Growth Tax Relief Reconciliation Act of 2003

Group Members
14092 14100 14102 14103 14157

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.

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% to 15%, 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

Significant Events Preceding the act

December 26, 2002
Rumor of 50% reduction of the dividend tax

January 6, 2003 April 30, 2003

May 9, 2003 May 15, 2003 May 23, 2003

Rumor of full elimination of dividend tax

Market learned that dividends would not be subject to full exclusion but at the rate of 15% tax. The bill providing for reduction in the dividend tax passed the House of Representatives The bill the passed the Senate by (51-50) vote.

The Act was passed by Congress

Research Questions
First research question concerns with the relationship between dividend yield and share price reaction to the announced reduction in dividend tax rates. Second research question examines the moderating effect of institutional ownership on the relation between share price reaction and dividend yield.

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.

Research Questions
Ayers et al: stock prices reaction is positively correlated with firm dividend yields and negatively correlated with the degree of institutional ownership of the firm. Lightner et al: statistically significant negative relationship between dividend yield and the change in institutional ownership. Dhaliwal et al: During when the dividend tax penalty is relatively high, the cost of capital is notably higher for high-dividend paying firms.

Research Method
Estimate the following regression model for testing the hypothesisCARit=0+ 1 Eventt+ 2 Yieldi+ 3 INSTSHit+ 4 EventtYield i+ 5 YieldiINSTISHi+ 6 EventtYieldiINSTISHi+ kXki+ it

Research Method
Where:

CAR(it): Cumulative abnormal return for sample firm i cumulated over 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 event Period & 0 for the control periods surrounding JGTRRA. Yield ( t): Common stock dividends divided by market value of equity for firm i as December 31,2002 INSTISH(i): Percent of outstanding shares held by institutions for firm 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 during the sample period.

Research Method
An event study methodology was used to investigate whether the reduction in dividend tax rates associated with JGTRRA affected stock prices. A standard market model to estimate daily abnormal returns using a 3-day window beginning 1 day prior to the event date & ending 1 day after the event date. Within our presentation, we emphases on some specific variables that we have deemed to be relevant, i.e. EVENT x YIELD, EVENT x INSTSH x YIELD. Moreover, we have analyzed three statistically arranged tables. They are:

Research Method
Table-3. Cross-sectional OLS Regression of Cumulative Abnormal Returns on Independent and Control Variables around Key announcement dates leading up to the JGTRRA 2003. Table-4. Cross-sectional OLS Regression of Cumulative Abnormal Returns on Independent and Control Variables around May 15 and 23 announcement dates.

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

Results

1. The relationship between dividend yield and share price reaction to the announced reduction in dividend tax rates.

Results
Event Date Results Using Regression Model

Variable
December 25, 2002 (50% Reduction of dividend tax) EVENT * YIELD

Estimated Coefficient
0.092
0.101 Failed to find any significant relation between yield and abnormal return (EVENT * YIELD). Results not reported.

January 6, 2003 (Elimination of EVENT * YIELD the dividend tax) April 30, 2003 (Market learned that There will not be full exemption but 15% tax rate will be applicable) EVENT * YIELD

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.
.203 .141

May 15, 2003 (the bill passed the senate with 51-50 vote) May 23 (the bill passed the House of Congress)

EVENT * YIELD EVENT * YIELD

Results
2. The moderating effect of institutional ownership on the relation between share price reaction and dividend yield.

Results
Quintile Mean Yield(N) Changes In Institutional Ownership between Quarters 3 and 4 of 2002 Changes In Institutional Ownership between Quarters 1 and 2 of 2003

1 (Lowest)
2 3 4

0.007
0.017 0.025 0.035

-.004
-0.006 -0.006 -0.006

0.01
0.001 0.007 0.007

0.075

-0.01

0.01

Conclusion
The is a role for dividend policy in influencing the stock price reaction to announcement in dividend tax changes Level of institutional ownership has no impact when tax rates are decreasing, unlike the case of rate increases

Q&A