AbstractThis thesis develops and tests a number of hypotheses examining the relationship between ‘shareholder dividend taxation’ and market value of a sample of UK firms’ equity. Specifically, this thesis tests for evidence of ‘shareholder dividend taxation’ impounded into share prices. This issue has many corporate financial implications. Understanding what affects corporate distributions is central to the understanding of the firm as there are potential implications regarding the allocation of resources and investment decisions. If share prices incorporate dividend taxation, this affects firms’ cost of equity capital.
An ongoing ‘shareholder dividend tax’ capitalisation debate in the US has produced conflicting results as to existence or degree of capitalisation. This lack of consensus in the US raises the issue of the position with respect to UK companies, particularly with the clear differences between the two countries tax systems.
The common element linking the majority of the US models is that they are derived from the Ohlson (1995) valuation model. Ohlson (1995) demonstrates that given certain restrictive assumptions equity value can be modelled by the book value of equity (BV) and the level of net earnings (NI). The model predicts that BV and NI are positively related to equity value; however issues of ‘shareholder dividend tax’ capitalisation may affect the relative importance of the relationship between equity value and the components of BV (ISC and RE).
To relax some of the restrictive assumptions of the Ohlson (1995) model, the valuation models used in this thesis include a number of control factors. In addition, the sensitivity of the results has been assessed by using a range of deflators to control for scale factors and models were estimated over RE/BV quintiles and dividend payout ratio based quintiles.
The sample comprises all non-financials from the Financial Times All Share Index for the period 1994 - 2000. This period was chosen to include the Finance Act (1997) abolition of repayment of dividend tax credits to tax exempt shareholders. Imposing a survivorship requirement is designed to overcome criticisms of prior research. Similarly, estimating over a balanced sample maintained a constant industry composition, which in turn controls for earnings persistence.
The results are mixed; there is some evidence in support of ‘shareholder dividend tax’ capitalisation in UK equities but this is sensitive to the year examined, the specific model used and the hypothesis tested. Two sub-hypotheses were developed to test the main hypothesis of this study; one provides considerable evidence in support of ‘shareholder dividend tax’ capitalisation, the second very little. The supporting evidence relates to the hypothesised relative changes in the RE coefficients pre and post 1997, but little support is evident for the absolute magnitude hypothesised i.e. comparison of the RE and ISC coefficients pre and post 1997. Although unequivocal the evidence in this thesis adds to the understanding of the effect of shareholder level taxes on share price.
|Date of Award||26 Mar 2010|
|Supervisor||Kevin Michael Peter Holland (Supervisor) & Owain Maelor Ap Gwilym (Supervisor)|