Dividend tax cut and security prices: Examining the effect of the Jobs and Growth Tax Relief Reconciliation Act of 2003

Changes in dividend taxation for individuals under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JAGTRRA) allow us to test hypotheses motivated by the dividend valuation and policy theory. Using event studies, we find that, consistent with both the tax-clientele and short-term trader hypotheses, high-dividend stocks outperform low-dividend stocks with a reduction in dividend taxation. Consistent with the excess funds hypothesis, we find that firms that were currently paying no dividends and firms with high cash holdings, low debt ratios, and low Tobin's were winners under the 2003 dividend tax cut.