1. THE IMPACT OF A LARGE DIVIDEND TAX CHANGE ON EX-DIVIDEND DAY SHARE PRICE BEHAVIOR: A NATURAL EXPERIMENT FROM SOUTH AFRICA
Phillip de Jager & Michelle Chinhema
University of Cape Town

2. Introduction 1 April 2012: STC changed to DT
Average SA investor better off
Did share prices reflect this fact?

3. Introduction JSE is 16th largest 381 companies +- 20% dual listed
British American Tobacco; SABMiller; BHP Billiton; Richemont; Anglo American

4. Limited other market factors

5. Literature review
Elton & Gruber (1970): 𝑃 𝑐𝑢𝑚 −( 𝑃 𝑐𝑢𝑚 − 𝑃 0 ) 𝑡 𝑐𝑔 = 𝑃 𝑒𝑥 −( 𝑃 𝑒𝑥 − 𝑃 0 ) 𝑡 𝑐𝑔 +d(1- 𝑡 𝑑 ) PDR= 𝑃 𝑐𝑢𝑚 − 𝑃 𝑒𝑥 𝑑 = (1− 𝑡 𝑑 ) (1− 𝑡 𝑐𝑔 )
P0 came off both sides of the equation. Thus struggled with equation‘s explanation.
Audience not all convinced of the mechanism of arbitrage. Relates somewhat back to not fully believing that STC was shareholder tax.

6. Literature review Tax clientele effect exists: Or not:
Elton, Gruber & Blake (2005) – confirmed in more than 12 countries
Or not:
Kalay (1982) – transaction costs limit arbitrage
Frank & Jagannatham (1998) – Hong Kong, microstructure effect
Bali & Hite (1998) – discreteness in prices rather than taxes
Recent work:
Elton, Gruber & Blake (2005) – closed-end dividends
Whitworth & Rao (2010) – very long US time series
Assumes marginal shareholder = individual tax payers
Assumes binary outcome
Assumes marginal shareholder = individual & corporate tax payers
No control for other factors

7. Contribution
“There are fewer better opportunities to test theories about taxes than the natural experiment created by changes in a country’s tax laws”
Excellent “control for other possible factors”
Tax paying shareholders grouped into 4 categories
Linked with literature on “institutional investors”
Not forcing a binary outcome
Research question: What does the 2012 dividend tax change in SA tell us about the tax clientele theory?

8. Tax collection statistics
Dividend tax in SA
STC=10% and DWT=15%
Tax collection statistics
Tax year
Company income tax
STC
DWT
2009/10 m
15 468m -
2010/11 m
17 178m
2011/12 m
21 965m
2012/13 m
9 814m
9 925m
2013/14 m
911m
16 398m
Audience not convinced that STC was a dividend tax that influenced investor decisions. Can be argued that STC reduced amount payable as dividend and thus those that prefer capital gains would have not preferred dividends. Also, definitive change into new dividends dispensation where shareholders can now choose. From system where decision was to pay CGT or not to one where you choose.
Why did SARS change the dividend tax system in 2012?
Why STC receipt after 2012 for ½ year?

9. Change expected PDR = (1− 𝑡 𝑑 ) (1− 𝑡 𝑐𝑔 )
Needed to explain more where PDR comes from. Put formula here for PDR.

10. Research approach
Calculate PDR for all companies two years before 1 April 2012 and 2 years after
Control for market movement on ex day
Comparison of means/medians
Fixed effect regression with control variables:
Size
Std deviation co/market
Dividend size
Dividend yield
Explain more such as all dividends less exclusions. Unbalanced panel. winsorization.

11. Comparison of means Pre change Post change Change % Mean - PDR 0.72*
0.87*
22.4%
Mean – PDR noadj.
0.67***
0.89***
33.3%
Median - PDR
0.86***
0.96***
11.6%
Median – PDR noadj.
0.87***
0.98***
12.6%
Sample size
509
517
Intuition for low PDR cannot be based on information effect. Rather liquidity effect.
Add mean and median for unadjusted PDR

12. Regression results
𝑃𝐷𝑅 𝑖𝑡 = 𝛼 0 + 𝛼 1 𝑝𝑒𝑟𝑖𝑜𝑑+ 𝛼 2−5 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 𝑖𝑡 + 𝜇 𝑖 + 𝜀 𝑖𝑡
Variable
Coefficient
Standard error
Constant **
Period dummy
***
Control: size **
Control: sd ratio *
Control: div
***
Control: dyield **
R-squared = 30.42%
Implied growth = 3.65%
Suggestions for size effect: Remember smaller PDR means preference for dividends
Institutions rebalancing portfolios with dividends; thus prefer dividends. Ties up with institutional herding and not signalling stock holdings to the competition.
Institutional investors prefer large liquid stocks. “…then a change in firm size may be more appealing because of additional liquidity, but less appealing because increased agency problems reduce expected cash flows”. In the absence of institutions the individual shareholders become the marginal shareholders and lower PDR results.
Institutions prefer “to invest in large, liquid stock that have low past returns”. High return companies all else equal will tend to grow fastest and thus not preferred by institutions. In the absence of institutions the individual shareholders become the marginal shareholders and lower PDR results.
What explains the negative relationship between increases in changes in size (beyond time invariant portion) and PDR?

13. Robustness checks No market adjustment – 4.29% and better fit
Differences model: ∆𝑃𝐷𝑅 𝑖𝑡 = 𝑃𝐷𝑅 𝑖𝑡−1 + 𝛼 0 + 𝛼 1 𝑝𝑒𝑟𝑖𝑜𝑑+ 𝛼 2−5 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 𝑖𝑡 + 𝜇 𝑖 + 𝜀 𝑖𝑡
2.02% growth implied (2.20% without market adjustment)
Remember that dividends and buybacks go hand in hand. Have to exclude buybacks as limitation.

14. Conclusions Direction of change consistent with tax explanation
Size of change consistent with tax explanation
Other explanations also valid and seemingly related to size effect
So what?
Trading opportunity for foreigner individuals
Argument that natural experiments are rare and thus SA experience valuable:
Sideways market (low noise)
Large tax effect that impacts different shareholders differently
Fixed effects eliminate other omitted variables
Comments for future study: What about looking at PDRs when CGT came into market?