Effects of dividend tax and signaling on firm valuation: Evidence from taxable stock dividend announcements

Our study aims to isolate the negative tax effect of dividends from their positive signaling effect. We explore the market valuation of taxable stock dividends in Taiwan because management's voluntary taxation makes these dividends a reliable signal. We find that controlling shareholders' shareholdings positively impact market reactions to announcements of taxable stock dividends, while shareholders' weighted average tax rates and the discrepancy between controlling shareholders' ownership and control rights have negative impacts. The integrated tax system that reduces investors' dividend tax burdens alleviates the effects of both tax and signaling. We contribute to the literature by determining the relative importance of tax and signaling effects on firm valuation and demonstrating a unique characteristic of the interaction between stock dividends and ultimate ownership structure.