Abstract
We use the anticipated expiration of the Bush tax cuts at the end of 2010 and 2012 to test whether investors value firms’ responsiveness to shareholder tax incentives. This setting provides a shock to the demand for dividends where the signaling implications of dividend announcements are substantially mitigated or absent. We examine the announcement of dividend accelerations and special dividends in November and December of 2010 and 2012, and find evidence that the price reaction is significantly larger than can be explained by tax savings alone. Our evidence is consistent with investors placing a premium on firms that respond to a heightened demand for dividends induced by a tax rate change, consistent with the notion that firms rationally cater to the demand for dividends.
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