Investor tax rationality and the relationship between dividend yields and equity returns: An explanatory note

Recently in this journal, it is contended that the empirically observed rel ationship between stock returns and dividend yields cannot be reconciled wi th tax rationality. In response, this present note re-examines the theoreti cal basis for this conclusion. We conclude that the empirical evidence of m arket behavior may at present be interpreted as consistent with investor ta x-based rationality that capitalizes the firm's earnings on an after-person al tax basis. (C) 2001 Elsevier Science B.V. All rights reserved.