Impact of 2004 tax change on valutation of dividends

Abstract

Taxation of dividends changed during 2005. This creates pressure for the mar-kets to change the valuation of the dividends, which can be witnessed by ob-serving the ex-dividend day ratios. Ex-ratios give information concerning the affect on the markets. Historically the dividend policies have required high commitment and thus there are only small changes in the actual payments.

Study of the change in the market valuation was done through usage of two different types of ex-day ratios. These ratios were calculated for the whole sam-ple and for three different types of dividend payment amounts labelled as low, medium and high. Years from 2001 to 2007 were included in the data, in certain situations the year 2005 was dropped, because of its nature of being a transition period.

It was clear from this study that there is statistically significant affect on ex-dividend day ratios. When looking at the different dividend payment groups the results are puzzling, since the research hypothesis failed. High dividend paying group was not affected according to the tax hypothesis instead it went to the opposite direction. Strongest tax affect was found in the low and medium dividend paying groups.