Dividend Taxes And Stock Volatility

Often when we discuss the effects of taxes, we focus on the effects on the mean of firm value and de-emphasize the effects on the variance of the distribution. The existing literature on dividend taxation has analyzed the effect on firm stock price (Auerbach and Hassett (2005) and Amromin, Harrison and Sharpe (2008)). However, there are two important moments for the stock: the level of the stock price and the volatility of the stock. In a world where executives are more risk averse than most shareholders (since they are unable to diversify away firm-speciffc risk), we want to focus on both the mean and the variance effects due to agency costs. If a dividend tax change suffciently increases volatility, the executive may take actions to decrease the volatility of the stock at the expense of the share price. Therefore, the stock price might not increase as much as it would have in a world with risk-neutral executives (or equally risk averse executives and shareholders). It is therefore important to consider the effects on the volatility of the stock.

Author: Board of Governors of the Federal Reserv, Penny Hill Press Inc

Publisher: CreateSpace Independent Publishing Platform

Publication Date: Jan 16, 2016

Number of Pages: 38 pages

Language: English

Binding: Paperback

ISBN-10: 1523423900

ISBN-13: 9781523423903