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Accounting , Areas of Study , Faculty Stories | Mar 28, 2012 |

Prof. Veliotis published in premier accounting journal

A paper written by accounting professor Stanley Veliotis was published in the spring 2012 edition of the Journal of the American Taxation Association, a premier publication for empirical tax researchers.

Co-authored with a colleague at the University of Connecticut, Amy Dunbar, the paper investigates what impact the 2003 Bush-era tax cuts had on the pre-tax yield of conventional preferred stock. These cuts reduced the tax rate on dividends significantly, from 35 percent down to 15 percent. What was the effect on yield?

Professors Veliotis and Dunbar did their research by choosing a stable basis of comparison — one company — and examining the yield of its conventional preferred stock versus the yields of its trust preferred stock. This allowed them to isolate the variable they were curious about, the effect of the tax cut, because only the conventional preferred stock was affected by it; the trust preferred stock was not eligible. They then repeated this analysis with many companies.

Veliotis and Dunbar found that before the tax cut was announced, the difference in yields between the two types of stock — referred to as “implicit tax” — was 0.92 percent. By the time the tax cut was put into place, the implicit tax rose to 1.46 percent, reflecting a dramatic response in the market as investors bid up the price of conventional preferred stocks.

The researchers also found evidence of a market bump for conventional preferred stock even when a firm didn’t have trust preferred stock for comparison. The results suggested to them that individual investors sought out conventional preferred stock after the tax cut, joining corporate investors, which long favored these stocks because of certain tax benefits afforded to corporations that invest in the stock of other corporations.

For Professor Veliotis, this spring’s journal selection was nearly 10 years in the making. He began collecting the data that formed the paper’s underpinnings in 2004, as part of an original paper he was required to prepare toward his doctoral degree.

“Other papers have sought to test the effects of tax law changes on stock prices,” Veliotis said. “However, our setting created a very clean experiment by focusing on preferred stock, which has fixed dividends, as opposed to common stock — the subject of other studies — whose dividends are not fixed and have other variables affecting their stock valuation.”

“Also, by comparing two different types of preferred stock of one given firm,” he added, “we were able to avoid the effects of market views of a given firm unrelated to tax laws.”

The Fordham Schools of Business congratulate Professor Veliotis on his research discoveries and on his selection for the Journal of the American Taxation Association.

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