Abstract:
For over 50 years academics have grappled with trying to understand and quantify the influence of dividend taxes on the behaviour of equity markets. As a shareholder, one should rationally be indifferent to receiving returns in the form of dividend payouts or value growth. Markets are, however, not perfectly efficient and investors are not completely rational. The purpose of this research project was to analyse and quantify the impact on the behaviour of South Africa's equity market, if any, resulting from the decision to replace the Secondary Tax on Companies system with the Dividend Withholding Tax regime at a higher effective tax rate. An events study methodology that was quantitative and causal in nature was used to test five hypotheses for three separate events that collaboratively indicate whether there was an impact from this change in dividend regulation or not. The results align with empirical evidence from international literature and indicate that there was indeed a significant, negative equity market impact resulting from the transition. The negative reaction is primarily attributable to the hike in the dividend tax rate rather than the reduction in regulatory complexity and was shown to be more significant for higher dividend yield firms.
