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Taxes, dividend yields and returns in the UK equity market

Morgan, G. and Thomas, S. (1998) Taxes, dividend yields and returns in the UK equity market Journal of Banking & Finance, 22, (4), pp. 405-423. (doi:10.1016/S0378-4266(98)00002-8).

Record type: Article


The higher rate of taxation on dividend income relative to capital gains has been offered as an explanation for the positive relation between stock returns and dividend yields among US firms. In the UK the relative tax rates are the reverse of those in the US. Thus, UK data provides an independent test of the tax-based approach to explaining the relation between stock returns and dividend yields. We find that high yielding stocks earn positive risk adjusted returns, whereas low yielding stocks earn negative risk adjusted returns. We also detect evidence of non-linearity in the performance of zero-dividend stocks. Controlling for firm size, seasonality and market risk we find a significant positive relation between dividend yields and returns. We conclude that the evidence is inconsistent with a tax-based explanation.

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Published date: 1998
Keywords: UK dividend yield, size, seasonality, taxes
Organisations: Management


Local EPrints ID: 37365
ISSN: 0378-4266
PURE UUID: 1d4213f9-7b3e-4051-b0b8-025a39d0f361

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Date deposited: 01 Mar 2007
Last modified: 17 Jul 2017 15:42

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Author: G. Morgan
Author: S. Thomas

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