We use cross‐sectional regressions to study how a firm's value is related to dividends and debt. With a good control for profitability, the regressions can measure how the taxation of dividends and debt affects firm value. Simple tax hypotheses say that value is negatively related to dividends and positively related to debt. We find the opposite. We infer that dividends and debt convey information about profitability (expected net cash flows) missed by a wide range of control variables. This information about profitability obscures any tax effects of financing decisions.
No takes yet. Share an insight, caveat, or question.
Fama et al. (1998) studied this question.
Synapse has enriched 3 closely related papers on similar clinical questions. Consider them for comparative context: