We test the hypothesis that the 2003 dividend tax cut boosted U.S. stock prices and thus
lowered the cost of equity. Using an event-study methodology, we attempt to identify an
aggregate stock market effect by comparing the behavior of U.S. common stock prices to
that of European stocks and real estate investment trusts. We also examine the relative
cross-sectional response of prices on high-dividend versus low-dividend paying stocks.
We do not find any imprint of the dividend tax cut news on the value of the aggregate
U.S. stock market. On the other hand, high-dividend stocks outperformed low-dividend
stocks by a few percentage points over the event windows, suggesting that the tax cut did
induce asset reallocation within equity portfolios. Finally, the positive abnormal returns
on non-dividend paying U.S. stocks in 2003 do not appear to be tied to tax-cut news.