The Market Valuation of Cash Dividends and the Tax Differential Theory of Dividend Policy: A Case Revisited

One of the most controversial areas in finance concerns the relevance or irrelevance of dividend policy. Survey results reported by researchers indicate that corporate chief financial officers believe that dividend policy does affect stock prices. One factor that could cause dividend policy to matter is possible tax effects. However, although many maintain that tax treatment would favor low payout, Miller and Scholes argue that tax policy is irrelevant. The latest change in the tax code, which removed the lower capital gains tax rate, provides a unique opportunity to examine the relevance of tax policy alone. This study revisits the Citizens Utilities case, which was used by Long and Poterba. We conclude that the market for Citizens Utilities shares indicates that tax policy does influence value.