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Global Finance Journal 10:1 (1999) 35–52 An empirical examination of the effect of dividend taxation on asset pricing and returns in Germany A. Murphy a, *, C. Schlag b a Department of Finance, Oakland University, Rochester, MI, 48309-4493, USA b Department of Finance, University of Frankfurt, D-60054 Frankfurt am Main, Germany Received 13 July 1997; received in revised form 14 August 1997; accepted 14 May 1998 Abstract This research finds evidence that required pretax returns on German stocks are unchanged as a result of the enactment of a law in Germany providing shareholders with tax credits for dividends received. In the most recent time interval, higher risk-adjusted pretax returns are discovered on high-yielding German stocks. These findings imply that the effect of the tax credits has been more than offset by other factors. © 1999 Elsevier Science Inc. All rights reserved. The effect of dividend payments on required stock returns has been the source of a long series of debates and empirical tests (Keim, 1985). Research on the U.S. market has uncovered some evidence of a tax effect, where higher returns are required on stocks with higher dividends because dividend income has often been taxed at a higher rate than capital gain income (Litzenberger & Ramaswamy, 1979) and because capital gains can often be deferred for tax purposes through a strategy of buying and holding investments (Miller & Scholes, 1978). Some evidence of a clientele effect has been discovered, whereby the relation between required returns and dividend yields is nonlinear, because investors in different tax situations are attracted to stocks with different dividend yields (Blume, 1980). However, having demonstrated flaws in the research methodologies of these studies and having empirically found no evidence of a long-term relation between dividend yields and pretax returns in their own investiga- tion, Miller and Scholes (1978) have cast doubt on the existence of premium returns being required on higher-yielding stocks, which are preferred by some investors such * Correspondi ng author. Tel.: (248) 370- 2125 . 1044 -0283/99/$ – see front matter © 1999 Elsevier Science Inc. All rights reserved. PII: S104 4-0283( 99)00 004-6

An Empirical Exam Nation of the Effect of Dividend Taxation on Asset Pricing and Returns in Germany

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