Dividend Yields and Stock Returns: Implications of Abnormal January Returns

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Abstract
This study examines the empirical relation between stock returns and (long-run) dividend yields. The findings show that much of the phenomenon is due to a non-linear relation between dividend yields and returns in January. Regression coefficients on dividend yields, which some models predict should be non-zero due to differential taxation of dividends and capital gains, exhibit a significant January seasonal, even when controlling for size. This finding is significant since there are no provisions in the after-tax asset pricing models that predict the tax differential is more important in January than in other months.
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