Summary of Dividend Taxes and Stock Volatility

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Dividend Taxes and Stock Volatility summary
America’s 2003 dividend tax cut gave equity-compensated managers incentives to keep stock price volatility low, potentially harming shareholders.

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8 Innovation

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When adjusting the tax code, policy makers and economists may account for possible effects on stock prices, but not necessarily on stock volatility or on how changes in either could influence equity-compensated executives’ behavior on the job. This technical report by economist Erin E. Syron Ferris dives into complex analytics to see how the United States’ 2003 tax cut on dividends affected share prices, volatility and managerial risk aversion. Highly compensated individuals, including corporate executives, benefitted the most from the tax drop. But it may also have incentivized them to reduce price volatility, potentially harming shareholder returns. getAbstract suggests this methodical investigation to tax experts, remuneration specialists and portfolio analysts.

In this summary, you will learn

  • How America’s 2003 tax cut on dividends affected stock volatility
  • How tax changes motivate executives with equity compensation packages to dampen volatility
  • How executive activity to prevent volatility can have a negative impact on shareholders
 

Summary

In 2003, the United States Congress passed legislation that temporarily reduced the tax rate on qualified dividends from a maximum of 35% to 15%. Because dividends no longer had the same tax rate as personal income, high earners, including corporate executives, benefitted the most from the huge tax ...
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About the Author

Erin E. Syron Ferris is an economist at the Board of Governors of the Federal Reserve System.


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