This paper presents new evidence on how corporate payout policy responds to the differential between the tax burden on dividend income and that on accruing capital gains. It describes the construction of weighted average marginal tax rate series for the period since 1929, and it suggests that the enactment of the Job Growth of Taxpayer Relief Reconciliation Act of 2003 should raise the after-tax value of dividends relative to capital gains by more than five percentage points. The impact of this change on payout depends on the elasticity of dividend payments with respect to the after-tax value of dividend income relative to capital gains. Time series estimates suggest an elasticity of more than three, and imply that the recent tax reform could ultimately increase dividends by almost twenty percent.

This paper re-examines the case of Citizens Utilities, a firm with one class of common stock which pays stock dividends and one which pays taxable cash dividends. John Long's (1978) study of the two shares' relative prices suggests that investors may prefer cash dividends to equal-sized stock dividends. This paper finds that the cash dividend share's ex-day price decline is less than their dividend payment. Stock dividend shares fall by nearly their full dividend. The disparity between ex-day dividend valuation and the observed prices of the two shares is inconsistent with some explanations of the demand for cash dividends.

This article examines the linkages between equity markets. The authors present a detailed analysis of the correlations between roughly coincident returns in different equity markets. They also uncover an intriguing fact: The volatility of the London stock market is higher than usual around the time when the NYSE opens. This may support their contagion theory, which argues that traders in one market draw inferences about shocks to share-price fundamentals from observed price movements in other markets. Even price moves which are not generated by fundamentals can therefore affect many markets. The findings raise two basic questions about the comovements in international equity markets. The first is whether there is any reason to expect the correlations across markets to be stable through time. This article emphasizes that returns on the London, New York, and Tokyo markets were more highly correlated around the market break of October 1987 than in other periods....

Inflation reduces the effective cost of homeownership and raises the tax subsidy to owner occupation. This paper presents an asset-market model of the housing market and estimates how changes in the expected inflation rate affect the real price of houses and the equilibrium size of the housing capital stock. Simulation results suggest that the accelerating inflation of the 1970s, which substantially reduced homeowners' user costs, could have accounted for as much as a 30 percent increase in real house prices. Persistent high inflation rates could lead ultimately to a sizable increase in the stock of owner-occupied housing.

This paper investigates the association between population age structure, particularly the share of the population in the ‘prime saving years’ (40 to 64), and the returns on stocks and bonds. The paper is motivated by recent claims that the aging of the ‘baby boom’ cohort is a key factor in explaining the recent rise in asset values, and by predictions that asset prices will decline when this group reaches retirement age and begins to reduce its asset holdings. This paper begins by considering household age-asset accumulation profiles. Data from repeated cross sections of the Survey of Consumer Finances suggest that, whereas age-wealth profiles rise sharply when households are in their thirties and forties, they decline much more gradually when households are in their retirement years. When these data are used to generate ‘projected asset demands’ based on the projected future age structure of the U.S. population, they do not show a sharp decline in asset demand between 2020 and 2050. The paper considers the historical relationship between demographic structure and real returns on Treasury bills, long-term government bonds, and corporate stock, using data from the United States, Canada, and the United Kingdom. Although theoretical models generally suggest that equilibrium returns on financial assets will vary in response to changes in population age structure, it is difficult to find robust evidence of such relationships in the time series data. This is partly due to the limited power of statistical tests based on the few ‘effective degrees of freedom’ in the historical record of age structure and asset returns. These results suggest caution in projecting large future changes in asset values on the basis of shifting demographics. Although the projected asset demand does display some correlation with the price-dividend ratio on corporate stocks, this does not portend a sharp prospective decline in asset values, because the projected asset demand variable does not fall in future decades.

Elderly individuals exhibit wide disparities in their sources of income. For those in the bottom half of the income distribution, Social Security is the most important source of support; program changes would directly affect their well-being. Income from private pensions, assets, and earnings are relatively more important for higher-income elderly individuals, who have more diverse income sources. The trend from private sector defined benefit to defined contribution pension plans has shifted responsibility for retirement security to individuals. A significant subset of the population is unlikely to be able to sustain their standard of living in retirement without higher pre-retirement saving.

The sharp decline in the stock prices of several firms at which employees held a large fraction of their 401(k) plan assets in company stock, including Enron, Global Crossing, Lucent, and Polaroid, has sparked a public-policy debate about investment options in 401(k) plans. At many large firms, particularly those with retirement saving plans that combine elements of an Employee Stock Ownership Plan (ESOP) with a traditional 401(k), a substantial fraction of defined-contribution retirement-plan assets are held in company stock. Such undiversified holdings are a source of concern because they raise the volatility of the retirement wealth for employees and expose some workers to the prospect of very small retirement values. Holding an undiversified position in employer stock may be particularly costly because of the potential correlation between company stock returns and the value of the worker’s human capital, which may depend on the company’s prospects. This paper reviews the extent of undiversified company-stock investments in 401(k) plans, evaluates the cost of such investments from an employee’s perspective, and discusses a range of policy actions that could address the excessive concentration of retirement plan assets.