A TAX-BASED TEST OF THE DIVIDEND SIGNALING HYPOTHESIS

We propose and implement a new test of the dividend signaling hypothes is. Dividend signaling models generally imply that an increase in divi dend taxation should increase the share price response per dollar of d ividends (or ''bang-for-the-buck''). Many other dividend-preference th eories have the opposite implication. An analysis of recent variations in tax policy reveals a strong positive relation between dividend tax rates and the bang-for-the-buck. Additional evidence on the relation between the bang-for-the-buck and other variables that are related to the marginal cost of paying dividend's provides further support for di vidend signaling.