Dividend Yields and Stock Returns: A Test for Tax Effects

This paper examines the empirical relation between stock returns and dividend yields. Several equilibrium pricing models incorporating differential taxation of dividends and capital gains are nested as systems of time series regressions. Estimates of these models and tests of parameter restrictions implied by the models are conducted within the context of Zellner's seemingly unrelated regression. It is concluded that the data fail to support these models as well as the hypothesis that dividends are neutral. The inability to distinguish between these competing hypotheses suggests the need for further research before definitive conclusions are reached regarding the tax impacts of dividends.