Tax-based signalling, evidence from the Dutch stock market

Dividends are taxed at a higher rate in the U.S. than income, which lead to several theories as to way companies pay dividends to their shareholders. Tax-based signalling models assume that it is the higher taxation of dividends that make them informative about the company. Amihud and Murgia (1997) find in their paper that although German dividends are taxed at a lower rate than income tax, the dividend announcements are still informative about the company. Suggesting there might be other reasons than taxation that make dividend announcements informative about the company. This thesis researches whether the tax-based dividend model holds in the Dutch market, where dividend tax is lower than the box 3 income tax. But because dividend tax serves as a withholding tax for the box 1 income tax, it is not clear cut whether Dutch investors would follow the tax-based signaling model. This thesis finds that Dutch shareholders do not behave in accordance with tax-based signalling models and substantiates the findings of Amihud and Murgia; there might be other reasons beyond tax that explain why corporations pay dividends.