The dividend-clientele controversy and the tax reform act of 1986

Abstract

Several recent studies employ the Tax Reform Act of 1986 (TRA) to reexamine the dividend tax clientele hypothesis. Because TRA effectively equalized the rate of taxation between dividends and capital gains, its implementation should provide a platform for resolving this controversy. Instead, reported results remain sharply divergent. This study attempts to shed new light on the dividend-clientele question through use of a method that carefully matches preand post-TRA dividend activity and avoids problems associated with the distribution of data. No significant or systematic changes in the ex-dividend price behavior of common stocks as a result of the Tax Reform Act of 1986 are reported.

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