Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts

Abstract

Prior empirical evidence regarding the impact of dividend taxes on firm valuation is mixed.This study avoids some of the complications encountered in previous empirical work by exploiting institutional characteristics of REITs, such as their limited discretion over dividend policy and the relative transparency of REIT assets.We regress the market value of equity on the market value of assets and tax basis, which creates tax deductions that lower future dividend taxes without affecting future pretax cash flow. We find that firm value is positively related to tax basis, suggesting that future dividend taxes are capitalized into share prices.

Have Equity REITs Experienced Periodically Collapsing Bubbles?

“…Following Jirasakuldech et al (2006), we recognize the structural shift in the REIT markets in 1991 in testing for unit roots in equity REIT prices and dividends, respectively. The hypothesized structural shift can be attributed to the following: (1) the REIT market became more dominated by large institutional investors along with increased market liquidity in the post 1992 period (Below et al 1996;Chan et al 2003;Chan et al 1998;Damodaran and Liu 1993;Wang et al 1995); (2) analyst and media coverage of the REIT markets increased, thereby increasing the transparency of the market throughout the 1990s (Chui et al 2003;Gentry et al 2003); and (3) the creation of the umbrella partnership REIT organization structure in 1991 allowed for more flexibility in purchasing property; however, the lack of transparency has made valuation more difficult (Damodaran et al 1997;Ling and Ryngaert 1997).…”

CEO Involvement in Director Selection: Implications for REIT Dividend Policy

“…Han (2006) notes that it is difficult to determine the fair value of real property transactions which often include a wide range of heterogeneous and illiquid assets. Among authors who hold a contrary view, Gentry et al (2003) argue that the value of a REIT is simply the aggregate fair market value of its assets. Hartzell et al (2005) assert that REITs are easy to value due to their tangible assets and relatively transparent structure.…”

Institutional Monitoring and REIT CEO Compensation

“…Some authors hold the contrary view, however. Gentry et al (2003) argue that the value of a REIT is simply the aggregate fair market value of its assets. Hartzell et al (2005) and Hartzell et al (2008) assert that REITs are easy to value due to their tangible assets and relatively transparent structure.…”