Join getAbstract to access the summary!

Dividend Taxes and Stock Volatility

Join getAbstract to access the summary!

Dividend Taxes and Stock Volatility

Federal Reserve Board,

5 min read
5 take-aways
Audio & text

What's inside?

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

auto-generated audio
  • 0.5×
  • 0.75×
  • 1×
  • 1.25×
  • 1.5×
  • 1.75×
1×
auto-generated audio

Editorial Rating

7

Qualities

  • Analytical
  • Innovative
  • Scientific

Recommendation

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.

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 drop.

Firms provide compensation to executives in the form of wages, stock and stock options. While the latter two serve to align management’s interests with those of shareholders where share price is concerned, volatility may be a different story. On that front, risk-averse executives...

About the Author

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

Comment on this summary