An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Wanncherng Wang
National Cheng Kung University

Li - Hsiang Wang
National Tax Bureau

Abstract: This study examines dividend tax capitalization within the framework of tax-clientele hypothesis. We first regress share price on contributed capital and retained earnings without controlling for the cross-sectional variations in dividend tax for comparison purpose. The empirical results show that contributed capital commands a higher valuation weight than retained earnings. The second empirical test considers the dividend-tax implications of changes in tax law on dividend tax for the valuation of retained earnings. After controlling for the structural change, profitability and growth in valuation model, we find evidence consistent with dividend tax capitalization. Third, we proxy for shareholders’ potential dividend tax and examine how the estimated coefficients vary with potential dividend tax clienteles.

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