A Study On Dividend Tax Effect In Dividend Policy For Listed Companies In China

For individual taxpayers, dividend income is taxed at a higher effective rate than capital gains income. As a result, there is a tax penalty to receiving dividend income for individual taxpayers. This penalty is often referred to as a dividend tax penalty. An actively addressed question is whether a dividend tax penalty is capitalized into the return on a firm's common stock. This is an important issue, which relates to the company's dividend policy and it affect the cost of equity capital,then the value of the firm. It is a hot topic abroad, scholars began to study it in the sixties and seventies of last century, but no consensus has yet emerged on the question of whether a dividend tax penalty is capitalized into the return on a firm's common stock. Securities market in China has developed less than twenty years, and capital gains is not taxed, so dividend tax is obviously higher than the capital gains tax. Then, does the phenomenon of tax impact of dividend policy exist?The tax for individuals declines from 20% to 10% on June 13.2005, which provides a good texting ground. In this paper, I take the tax reform in 2005 as the dividing point, select the company paying out cash dividends between 2003 to 2007,employ the Fama-French's CAPM, take the expected risky yield of the stock as the dependent variable, and take the level of dividend as the independent variable. Also, the control variables, such as the company scale, the ownership structure, the book value to the market value, the systematic risk beta, are incorporated in the model. We use the dividend yield as the level of dividend paying out, take the major business income to represent the company scale, and take the circulating stock proportion to stand for the ownership structure to make an imperial analysis of data from China's A share market with the statistical software STATA. First is the descriptive statistics of all variables, the independent variables and the dependent variable trends are described, and Pearson correlation analysis of all variables in order to obtain the correlation between each variable and the significance level, and then is multiple regression, to verify the correlation between the variables and the dependent variable, and next the comparative analysis of the dividend yield coefficients before and after the tax reform; finally in order to get a more robust conclusions, this article take the dividend payout ratio and the dummy variable whether or not to pay dividends instead of the dividend yield to test the robustness.It is found that (1) there is a positive correlation between the dividend yield and stock returns, which has passed a significance test, which proved the existence of the dividend tax effect on dividend policy in China's A stock market. (2) Dividend yield coefficient before the tax reform is greater than that after the tax-reform, which shows that after the dividend tax cut, the tax effect is becoming less, and this also proves the existence of dividend tax effect in China. (3) The empirical results also show that there is a significant correlation between the size of the company, the book value to the market value, the systematic risk and the expected risky yield of the stock, which was basically the same as the findings of domestic and foreign scholars. And there was no significantly positive correlation between the circulating stock proportion standing for the ownership structure and the expected risky yield of the stock, indicating China's investors pay little attention to corporate management of listed companies.This study results support the "concept of tax penalties," that is, due to the presence of dividend tax, the individual taxpayers would require a higher stock returns; thus it is unreasonable in China to collect taxes on the dividend income while not on capital gains income, as it would increase the cost of companies who issue cash dividends thereby inhibiting the release of cash dividends, so that there would be a lot of surplus cash in the listed companies and result in agency costs. At the same time, it is in violation of the principle of fairness to tax dividends from the corporate and later from the individual investors, which would cause a negative mood to the individual investors, and in the current finance environment in China, it is recommended in this article to reduce the dividend tax or levy a capital gains tax to development stock market.