Ex-Effects: Ex-Dividend-Ex-Rights Corroboration And The Imp

Two polar viewpoints regarding the market valuation of funds retained within the corporate sector are the "conventional" and the "capitalization" hypotheses. The conventional view assumes that one pound retained by the firm increases its market value by one pound. In contrast, the capitalization view asserts that, under steady state assumptions, retentions are not capitalized on a pound-for-pound basis, but on a q-pound-for-one-pound basis where, under a classical corporate tax system, q is strictly less than unity. Provided direct transfers that circumvent the tax system are ruled out, any retention can be regarded as a deferred dividend. Under simplifying "representative rate" arguments, this leads to the view that, under rational expectations, the market price should reflect the incremental tax liability on distribution. The hypothesis is proposed that, if the ex-effect is a long-term capitalization of investors' tax rates, then different ex-events for a given firm should be subject to similar valuation perturbations. No evidence is found for the uniformity of such valuation effects.