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Investor Response to a Reduction in the Dividend Tax Rate: Evidence from the Jobs & Growth Tax Relief Reconciliation Act of 2003
Teresa Ann Lightner, Texas Tech University
Michaele Morrow, Texas Tech University
Robert Ricketts, Texas Tech University
Mark Riley, Northern Illinois University
ABSTRACT. This study examines investor reaction to the reduction in federal income tax rates on dividends resulting from passage of the Jobs & Growth Tax Relief Reconciliation Act of 2003. We investigate the existence of a clientele shift associated with the JGTRRA by examining trading volume in dividend paying stocks surrounding passage of the Tax Act. Also, we examine changes in shareholder composition of firms over the period between announcement in the press and final passage of the plan. We find dividend yield to be a significant predictor of abnormal trading volume around key dates, including the date the plan to reduce dividend taxes was first covered in the press. Furthermore, we find a large and statistically significant negative relationship between dividend yield and the change in institutional ownership. Overall, our findings support the existence, at the investor level, of a tax clientele for dividends.
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