Abstract
The 1986 Canadian federal budget, which increased the tax rate on dividends vis-a-vis capital gains, provides a natural experiment for examining the relationship between taxation and asset values. The authors employ a stock market event study to investigate the differential impact of this tax change on high- and low-dividend securities. To control for other new information contained in the budget, they focus on companies that issue both preferred (high-dividend) stocks and common (low-dividend) stocks. The authors find that abnormal returns are negatively related to dividend yields, which provides support for the hypothesis that taxes affect stock prices.
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