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December 4, 2016
Canadian Excellence

Tao Zeng


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Tao Zeng

Personal taxation in firm market valuation: Theory and test (ABSTRACT)

Zeng, T.

published: 2002 | Research publication | Refereed Journals - Accounting

Zeng, T. (2002). "Personal taxation in firm market valuation: Theory and test". Canadian Accounting Perspectives, 1 (1), 29-52.


ABSTRACT: This paper extends Ohlson's 1995 firm market valuation model to incorporate personal taxes: the taxes on dividends and the taxes on capital gains. Without personal taxes, firm market value can be expressed as the present value of future benefits received by the shareholders (dividends, in this case). With personal taxes, the benefits received by the shareholders should be classified into 3 categories (due to their different tax treatments): dividends, share repurchases, and new share issues (i.e., contributed capital). The extended model shows the effects of personal taxation on firm market valuation: retained earnings are valued less than contributed stocks, both dividends taxes and capital gains taxes affect retained earnings valuation and firm market value, and firms choose cash distribution methods (paying dividends and repurchasing shares) to increase their retained earnings valuation, therefore increasing their market value. An empirical test suing a sample from the Disclosure Select Canada and Financial Post Card data bases for the years 1995-1998 supports these personal tax effects.

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revised Jan 18/05

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