A Study on the Stock Market Reaction to the Modified Imputation Tax System
Date Issued
2015
Date
2015
Author(s)
Chang, Yung-Tang
Abstract
Taiwan has implemented the integrated income tax system to prevent the double taxation of dividends since 1998. However, it didn’t meet the goals of investment promotion, but expanded the gap between the poor and the rich. To rationalize the nation’s taxation system, the modified imputation tax system proposal passed its third reading in the Legislature Yuan on May 16, 2014. This paper uses event study methodology to examine the stock market reaction to the modification of Imputation Tax System. Two event days are chosen: (1) March 13, 2014, the date the Executive Yuan passed the resolution. (2) May 16, 2014, the date the Legislative Yuan passed the third reading and approved the amendment of the imputation tax system. To analyze the variations of abnormal returns of stock prices on the event days, this study tests weather the imputation credits available for individual shareholders, foreign investors'' holding rate, dividend yield and profitability can explain the abnormal returns of stock prices. The results of the regression analysis are as follows: (1) As we expected, cumulative abnormal returns (CAR) were negatively related with foreign investors'' holding rate, and positively related with the profitability of the firms. (2) The imputation credit available for individual shareholders and the dividend yield didn’t have a significantly negative correlation with CAR. We infer that domestic individual shareholders will not respond to the bad news until they receive dividends in 2015. (the year the partial imputed tax credit system actually takes effect on the dividends received ).
Subjects
Modified Imputation Tax System
Income Tax Integration
Event Study
Abnormal Return
Type
thesis