Empirical Testing of Dividend Policy Tax Effect Dividends are taxed more heavily than capital gains, so before-tax returns should be higher for high dividend-paying firms Empirical results are mixed - recently the evidence is largely consistent with dividend neutrality Financial Signaling Expect that increases (decreases)in dividends lead to positive(negative)excess stock returns. Empirical results are consistent with these 18-10 expectations.18-10 Empirical Testing of Dividend Policy Tax Effect Dividends are taxed more heavily than capital gains, so before-tax returns should be higher for high￾dividend-paying firms. Empirical results are mixed -- recently the evidence is largely consistent with dividend neutrality. Financial Signaling Expect that increases (decreases) in dividends lead to positive (negative) excess stock returns. Empirical results are consistent with these expectations