The Market Value of the Tax-Timing Option: Evidence
from Taxable Stock Dividends with Deferring Taxation
Option
Cheng-Few Lee, PhD
Distinguished Professor of Finance
Rutgers University, USA
Nan-Ting Kuo, PhD
Assistant Professor
National Central University, Taiwan
*
Please correspond with following addresses:
Cheng-Few Lee, Rutgers Business School, Rutgers University, Piscataway, New Jersey
08854-8054, USA, Tel: (732) 445-3530, Fax: (732) 445-5927, E-Mail:
lee@business.rutgers.edu.
Nan-Ting Kuo, No.134, Lane 133, Sec. 1, Jiankang Rd., South District, Tainan City 702,
R.O.C.,
E-Mail: kuonantin@hotmail.com. Tel: 00886-6-2158034.
The Market Value of the Tax-Timing Option: Evidence
from Taxable Stock Dividends with Deferring Taxation
Option
ABSTRACT
We estimate the market valuation of the tax-timing option and to what extent this valuation is
affected by investors’ tax statuses. By examining ex-day stock price changes for taxable stock
dividends, we find that for $1 taxable stock dividend, the deferring taxation option on average
results in 18.71¢ tax savings in present values, and a 1% increase in the weighted average tax
rate of shareholders produces about 1.68¢ increase in the value of that option. Furthermore,
high-tax-rate individual shareholders are more likely to defer realizations of taxes than
low-tax-rate individual shareholders, and this suggests the potential violation of tax equity.
Keywords: Stock Dividends; Ex-Dividend Day; Ex-Right Day; Tax Timing Option;
Dividend Taxes Capitalization; Capital Gains Taxes Capitalization;
JEL Classification: G12; G30; G32;
Data Availability: Data used in this study are from public sources. A list of sample firms
may be obtained from the authors on request.