DIVIDENDS, TAXES, AND SIGNALING - EVIDENCE FROM GERMANY

The higher taxation of dividends in the United States gave rise to the ories that explain why companies pay dividends. Tax-based signaling mo dels propose that the higher tax on dividends is a necessary condition to make them informative about companies' values. In Germany, where d ividends are not tax-disadvantaged and in fact are taxed lower for mos t investor classes, these models predict that dividends are not inform ative. However, we find that the stock price reaction to dividend news in Germany is similar to that found in the United States. This sugges ts other reasons, beyond taxation, that make dividends informative.