Dividend Yields and Stock Returns under a Tax-Free Environment

Abstract

This study examines the relationship between dividend yield and stock returns for firms in the United Arab Emirates, where there are no taxes on dividend incomes and capital gains. Following methods of Black and Scholes (1974) and Litzenberger and Ramaswamy (1979), we find that yield coefficients using monthly data are insignificant under both BS and LR models, and yield coefficients using weekly data are significant under LR model. The results suggest that some other non-tax factor drives the yield effect and that return variation associated with dividends is caused by the time series variation. Our results are robust after we exclude periods with dividend omission and control for Fama-French factors.