Dividend Tax Capitalization and Stock Price Reactions: Insights from Taiwan’s Capital Markets
Chuan-San Wang/Department of Accounting, National Taiwan University
Abstract
We investigate the impact of dividend tax capitalization on stock prices by the event of the 2001 repeal of Article 238 of the Taiwan Company Act. This regulatory change required firms to decide whether to transfer capital reserves to retained earnings, effectively increasing their ability to pay cash dividends while holding other financial factors, such as profitability, cash flow, and financial health, constant. Our findings reveal a negative stock price reaction during the period surrounding the repeal of Article 238, particularly for firms with larger transferable capital reserves. Additionally, stock prices declined more sharply for firms with higher payout ratios over the previous three years, suggesting that investors incorporated the expected tax burden associated with increased dividend distributions into stock prices. By analyzing this tax policy change, which directly influenced firms’ ability to distribute dividends, this study contributes to the broader discussion on the role of taxation in stock price determination. It also offers valuable insights for policymakers considering future tax reforms and for firms determining dividend policy in Taiwan and other jurisdictions with similar tax structures.
Keywords
Dividend taxesTax capitalizationStock price reactionRepeal of Company Act Provisions
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