Since early 1956 Citizens Utilities Company has had two classes of common stock which are virtually identical in all respects except dividend payout. One class pays only stock dividends, the other class pays only cash dividends, and the corporate charter requires that the dividends per share on the two classes be of equivalent value. Under an I.R.S. ruling granted to Citizens Utilities in 1955 and a ‘grandfather clause’ in the 1969 Tax Reform Act, the stock dividends are not taxable as ordinary income. (No other publicly held firm has such a ruling and, in general, the 1969 Act made stock dividends of this type taxable.) Given these circumstances, the price-dividend history of the Citizens Utilities shares provides a view of the effects of alternative payout policies which, to an exceptional degree, is free of confounding factors. Close examination of this history implies that, if anything, claims to cash dividends have commanded a slight premium in the market over claims to equal amounts (before taxes) of capital gains.

A simple, necessary and sufficient condition is derived under which portfolios that are mean-variance efficient on a before-tax basis are also efficient on an after-tax basis and vice-versa. Under this condition and the hypothesis that investors demand after-tax efficient portfolios, the ‘no-tax’ form of the Capital Asset Pricing Model provides an accurate description of equilibrium asset returns even though investors in the economy may be subject to a wide variety of tax rates on dividends and capital gains. Evidence reported by Black and Scholes (1974), however, makes the condition for equivalence of before and after-tax efficiency empirically implausible. The paper thus concludes with a characterization of some essential differences between before and after-tax efficient portfolios and of the after-tax efficiency losses associated with before-tax efficient portfolios. The relation of these results to the issue of corporate dividend policy choices is also discussed.

In this article, the quantitative form of capital market equilibrium is derived for a multi-period economy in which (a) there are many consumption goods whose future prices are uncertain, and (b) the investment opportunities available to consumers include both common stocks and default-free bills of many different maturities. Particular emphasis is placed on consumer reaction to uncertainty about shifts in commodity prices and the term structure of interest rates and on the way one should expect to observe this reaction reflected in portfolio choices and equilibrium stock prices.

John B. Long, Jr., Session Topic: Finance and Industrial Organization: Discussion, The Journal of Finance, Vol. 31, No. 2, Papers and Proceedings of the Thirty-Fourth Annual Meeting of the American Finance Association Dallas, Texas December 28-30, 1975 (May, 1976), pp. 740-743

John B. Long, Jr., Session Topic: Risk, Information and Capital Budgeting: Discussion, The Journal of Finance, Vol. 29, No. 2, Papers and Proceedings of the Thirty-Second Annual Meeting of the American Finance Association, New York, New York, December 28-30, 1973 (May, 1974), pp. 485-488