The Informativeness of Dividends and Associated Tax Credits

Publication Type:
Journal Article
Citation:
Journal of Business Finance and Accounting, 2014, 41 (9-10), pp. 1309 - 1336
Issue Date:
2014-01-01
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© 2014 John Wiley & Sons Ltd. This paper investigates the informativeness of dividends and the associated tax credits with respect to earnings persistence. After confirming that dividend-paying firms have more persistent earnings than non-dividend-paying firms, we show that the taxation status of the dividend is also important. Firms that pay dividends with a full tax credit attached have significantly more persistent earnings than firms that pay dividends which carry no associated tax credit. Consistent with higher levels of tax credits identifying more mature firms, those paying dividends with full tax credits have significantly less persistent losses than firms that pay dividends with only partial tax credits. Further, market pricing tests confirm that the incremental information in dividends and tax credits contributes to reductions in market mispricing of the persistence of earnings and earnings components. Our results are robust to alternative model specifications and controlling for dividend size and firm age.
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