An Empirical Study On Tax Effect Of Dividend Policy In China

Dividend policy is an issue with considerable controversy in the field of finance.Among the internal and eXternal factors concerning dividend policy, the taxadvantage of capital gains over dividend income is an important one that shouldaffect both corporate considerations and investors' demand fOr dividends.In this paper, employing Brennan's Aner-tax CAPM, the author conducts anempirical study on whether there is tax effect on dividend po1icy in China. ThesampIe contains 67l stocks that pay out dividends in June and July from 2000 to2002. In addition, the author studies the ex-dividend day stock price behavior usingthe same samp1e.The fOllowing conclusions are summarized from this empirical study; (l) The' expected pretax monthly returns of stocks are positively correlated to dividendyields. Investors need higher pretax raturns to offset the disadvantages of dividendtax, (2) The effect of dividend tax is significant on ex-dividend-day and monthlyyield, but the tax effect on yearly yield is not confirmed, (3) There are other factorsaffecting stocks' expected returns besides tax during the ex-dividend days.