The share price effects of dividend taxes and tax imputation credits

We examine the hypothesis that dividend taxes are capitalized into share pr ices by focusing on investors' implicit valuations of retained earnings Ver sus paid-in equity. Retained earnings are distributable as taxable dividend s, whereas paid-in equity is distributable as a tax-free return of capital. Consistent with dividend tax capitalization, firm-level results for the Un ited States indicate that accumulated retained earnings are valued less per unit than contributed capital. In addition, differences in dividend tar ra tes across U.S. tax regimes are associated with predictable differences in the magnitude of the implied tax discount for retained earnings, as are dif ferences in dividend tax rates across Australia, Japan, France, Germany, an d the United Kingdom. (C) 2001 Elsevier Science B.V. All rights reserved.