TAXES AND DIVIDENDS - THE UK EVIDENCE

This paper provides empirical evidence on the simultaneous effects of both corporation and personal income taxes on dividend payment adjustm ents and on the behaviour of share prices on the ex-dividend dates. Th e results show that companies set their dividend policies to minimise their tax liability and to maximise the after-tax return of their shar eholders. In particular, firms that are unable to deduct the advanced corporation tax from their tax liability are found to pay low dividend s. In addition, consistent with the tax hypothesis, we find that the d ifferential taxation of dividends and capital gains results in a decre ase in ex-day share prices by significantly less than the amount of th e dividend. There is no evidence of a tax-induced dividend clientele.