ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Effects of Taxation Package to Boost Dividend Income on Stock Market

  • Jai Bong You University of Seoul Graduate School of Taxation

Asian Tax Journal Vol. 18 No. 6 (2017), pp. 177-216

Abstract

In August 2014, the South Korean government temporarily introduced ‘the three taxation packages to boost household income’ in order to revitalize a sluggish domestic economy. The three taxation packages consisted of a package to boost labor income, a package to boost dividend income, and a package to strengthen the link between corporate earnings and household income. Among these three, the package to boost dividend income lowered the individual shareholder’s withholding tax rate on dividend income, given that the income was being paid from a high－dividend corporation. Furthermore, it allowed a shareholder who was subject to comprehensive taxation on financial income to choose a separate form of taxation or tax credit. This study examines the taxation package to boost dividend income’s effectiveness at increasing investors’ demands for stocks of high dividend corporations. Results were obtained through an event study analysis, comparing the difference in stock price return on the announcement date of the package to boost dividend income plan and the dates of the 2014－2015 fiscal year’s settlement. This was done after classifying stock price response by company type, the percentage of individual shareholder’s shareholdings, and dividend payment. The results of empirical analysis showed that stock price responses on the taxation package to boost dividend income’s announcement date were significantly negative. In particular, corporations with a high－ratio of individual’s shareholdings tended to show stronger negative stock price responses. This conclusion was drawn from the fact that the tax benefits of the taxation package to boost dividend income were relatively small when compared to other taxation package changes, such as the improvement of taxation on pension income. In the cases of the 2014 and 2015 fiscal year’s settlement date, the overall stock price response of corporations that pay dividends, which were generally independent of the corporation classifications by individual shareholder’s stakeholdings and whether they were favorable or negative cases, was significantly positive. From this result, it can be interpreted that most small investors are indifferent to such tax revision plans, including the taxation package to boost dividend income, as the dividends of listed companies are mostly concentrated on a small number of large shareholders.

Keywords

  • Taxation package to boost dividend income
  • Corporation paying high dividend
  • AAR
  • CAR

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