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The authors investigate market reactions and portfolio performance around the announcement of the January 2003 proposal to eliminate shareholder-level taxes on dividends. They examine portfolios formed on dividend yield, momentum, and book-to-market equity during a 26-day trading window that includes a 9-day sub-window. Although stock reactions during the period depend on dividend yield, they find momentum and book-to-market is also important in explaining cross-sectional stock returns. The book-to-market effect is conditional on momentum and incremental to both the yield and distress risk effects. The evidence suggests that both the momentum and book-to-market effects during the event are likely to be related to investor sentiment and misvaluation.
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