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

David A. Guenther
University of Oregon

Richard Sansing
Dartmouth College & Tilburg University

Abstract: We investigate the effect of shareholder taxes on expected stock returns using a model that characterizes both the optimal portfolios of taxable and tax-exempt investors and the expected rates of return on risky stocks. When all income is taxed at the same effective rate, each investor’s ownership in each risky stock depends only on that investor’s relative tolerance for risk. A lower tax rate on capital gains induces taxable investors to hold more of the tax-favored stock, but risk-sharing considerations induce each investor to hold some stock unless the riskiness of the stock is sufficiently low. There is no marginal investor in this case. Each stock’s expected return reflects a dividend tax penalty, but the dividend tax penalty is not mitigated by the fraction of shares held by the tax-exempt investors.

Back to Session Listing

AAA Home Page