DIVIDEND POLICY AND VALUATION EFFECTS OF THE TAX REFORM ACT OF 1986

This study examines the effects of the Tax Reform Act of 1986 on shareholder wealth and dividend policy. Examination of 1160 U.S. firms traded on the New York and American Stock Exchanges indicates that high yield stocks significantly outperformed low yield stocks when the final terms of tax reform were determined and announced in August, 1986. In addition, investors correctly anticipated the final terms as early as June. These results are consistent with a simple partial equilibrium model developed in the paper. However, we find no evidence that dividend payouts incresed in response to tax reform.