Valuation Effects of Tax-free versus Taxed Cash Distributions

Abstract

This study attempts to resolve the puzzle regarding the announcement effects of cash distributions. The introduction of taxes on dividend income since 2009 has led many Greek listed companies to seek alternative ways of distributing untaxable income, at personal level, to shareholders, mainly through the form of return of capital. Employing a unique dataset of 130 returns of capital and a control sample of 890 dividends between 2000 and 2014, we investigate the stock price behaviour surrounding the announcement of these cash distributions. The results from the event study reveal a statistically significant market reaction on the announcement day for both cash distributions; however that of returns of capital was more than double compared to dividends (1.53% vs. 0.72%). The market reaction was even stronger when firms opted to distribute a dividend and a return of capital contemporaneously. Regression analysis delves into the determinants of the market reaction documenting that dividend or return of capital yield, firm size and profitability levels explain much of the stock price appreciation on announcement dates.