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Investor tax rationality and the relationship between dividend yields and equity returns: An explanatory note

Journal of Banking & Finance 2001 25(9), 1681-1686
Recently in this journal, it is contended that the empirically observed relationship between stock returns and dividend yields cannot be reconciled with tax rationality. In response, this present note re-examines the theoretical basis for this conclusion. We conclude that the empirical evidence of market behavior may at present be interpreted as consistent with investor tax-based rationality that capitalizes the firm's earnings on an after-personal tax basis.