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The effect of personal taxation on stock prices remains controversial. While some researchers have found evidence of a tax effect in the stock market, others have found evidence to the contrary. This paper provides additional empirical evidence on the effect of the differential taxation of dividends and capital gains on stock prices by analyzing stock price changes around the 1971 Canadian Tax Reform and its subsequent amendments in 1977. The results show that changes in the taxation of cash dividends and capital gains affected high-yield and low-yield stocks listed on the Toronto Stock Exchange (TSE) differently. Section I of the paper describes the tax changes. The method used to analyze the tax effect is described in Section II. Section III reports the results, and conclusions are presented in Section IV. [ABSTRACT FROM AUTHOR]

A number of investigators have reported that January stock returns in the U.S. exceed returns for other months of the year. This paper documents a similar finding for Canadian stocks over the period 1951-1980. However, Canada did not introduce a capital gains tax until 1973 and the paper reports that January returns in Canada exceed returns for other months of the year before and after this date. Thus, these data do not support the tax-loss-selling-pressure hypothesis as the entire explanation for the turn-of-the-year effect in stock returns, nor, by implication, do they support the tax-loss-selling-pressure hypothesis as the complete explanation for the "small firm" effect in U.S. stocks returns. [ABSTRACT FROM AUTHOR]

Since the publication of the seminal papers by Black and Scholes and Merton on the pricing of options and corporate liabilities, their basic framework has been extended and applied to a variety of problems in finance. More recently, the same framework has been used for the valuation of interest dependent claims, and in particular for the pricing of default free bonds. These securities (generally government bonds of various types) are valued by treating them as "contingent" upon the course of one or more interest rates, along with suitable assumptions about the term structure of interest rates. Brennan and Schwartz assume that the value of a default free bond is a function solely of the instantaneous interest rate and time to maturity, and show that various types of bonds—savings bonds, retractable and extendible bonds, and callable bonds—all follow the same partial differential equation as discount bonds, the distinguishing feature being the associated boundary conditions. Taking into account the considerable theoretical work that has been done, there is relatively little published empirical research testing these models. Most of the empirical work in the area of contingent claims analysis has been on the stock options market, with the exception of Ingersoll on the pricing of dual fund shares and Brennan and Schwartz on the valuation of Canadian Federal Government coupon bonds. In this paper contingent claims analysis is applied to the valuation of retractable and extendible bonds and the resultant model is then applied to price Government of Canada bonds. [ABSTRACT FROM AUTHOR]

The article refers to a study by Andrew Chen and Han Kim concerning theories of Corporate Debt Policy and other research such as a paper by M. H. Miller, which supported the irrelevance proposition in regard to corporate and personal taxes, and suggests that international comparisons can be used to test conflicting theories. An example is the dividend tax credit in Canada, which reduces the impact of double taxation on dividends and the amount of debt financing needed--an idea that might be tried in the United States where interest and dividends appear to be equally taxed. Research by Litzenberger and Van Horne (1978) concerning a net tax advantage with debt financing is mentioned.

This paper examines the issue of integration versus segmentation of the Canadian equity market relative to a global North American market. We compare the international and domestic versions of the CAPM, and find that integration, or the mean-variance efficiency of the global market index, is rejected by the data. Segmentation is the preferred model, based on a maximum likelihood procedure correcting for thin trading. We further divide the sample into securities that are interlisted in Canada and the U.S., and those that are not. Integration is rejected for both groups, which indicates that the source of segmentation can be traced to legal barriers based on the nationality of issuing firms. [ABSTRACT FROM AUTHOR]

With some simple assumptions the ex-dividend day price drop and the associated dividend can be used to measure the market's marginal tax rate. Previous research has estimated the implied tax rate for the U.S. This paper extends the analysis to Canada, where the tax treatment of dividends and capital gains is completely different from that in the U.S. The paper also presents estimates from 1970-80 to include four distinct periods when the tax treatment was different. Hence, we include an implied test of market efficiency as well as those for the "relevance" of taxes and the existence of tax based dividend clienteles. [ABSTRACT FROM AUTHOR]

This paper investigates the effect of a major Canadian tax reform on the ex-dividend day behavior of companies on the Toronto Stock Exchange. The results are inconsistent with the hypothesis that price changes on ex-dividend days reflect the relative taxation of dividends and capital gains for the “representative” investor, but are consistent with the hypothesis that ex-dividend day price behavior reflects short-term trading activities. [ABSTRACT FROM AUTHOR]

The article presents commentary about a paper written by L.B. Smith and J.W.L. Winder (S&W) entitled "Price and Interest Rate Expectations and the Demand for Money in Canada," which appeared in the June, 1971 issue of the "Journal of Finance." In that paper S&W presented a regression model in an effort to determine how the demand for real money balances is affected by expectations for interest rates. The author of the current paper presents analysis that offers a competing interpretation based on lagged responses, and also points out issues with serial correlation.

This paper reexamines the integration of the Canadian and U.S. stock markets in the 1977-86 period that is relatively free from capital controls. The study employs both the CAPM and the APT frameworks. Under both models, the evidence is consistent with segmentation in the 1977-81 subperiod, but supports integration in the 1982-86 subperiod. Using the APT framework, we also find that the Canadian stocks interlisted on the U.S. exchanges and NASDAQ are priced in an integrated market and segmentation is predominant for the non-interlisted Canadian stocks. [ABSTRACT FROM AUTHOR]

The paper analyzes bid-ask spreads on the Toronto Stock Exchange (TSE) and compares them to those of the New York Stock Exchange (NYSE). Pricing data were compiled for a total of 177 TSE stocks from December 1 to December 13, 1971. Comparisons with NYSE pricing data from previous studies reveal spreads to be wider and marketability services as a whole more costly on the TSE. Possible explanations include structural differences between the two markets, as well as the differing roles of NYSE specialists and TSE registered traders.

The article presents a reply to Kevin Clinton from L.B. Smith and J.W.L. Winder (S&W) concerning comments Clinton made about S&W's paper entitled "Price and Interest Rate Expectations and the Demand for Money in Canada," which appeared in the June, 1971 issue of the "Journal of Finance." S&W take issue with Clinton's interpretation of negative lag weights in their model. Additionally, they point out that a reservation Clinton had about a regression coefficient for interest rates was, in fact, consistent with their assumptions. Overall, they believe most of Clinton's criticisms stem from a misunderstanding of their work.

Subsequent to the October 1979 shift in monetary policy in the United States, interest rates in North America not only reached unprecedented levels but also exhibited unprecedented volatility. Using Canadian data, the authors show that anticipated quarterly changes in long-term rates associated with the rational-expectations model have remained small during this post-shift period. The authors examine three sets of recorded forecasts of long-term interest rates in Canada and note their failure to improve upon the no-change prediction. The "perverse" relationship between the slope of the yield curve and the subsequent movement in long-term rates exists in the Canadian data but is of only modest value in a forecasting context. The excess returns on long- term bonds implicit in the recorded forecasts of the level of interest rates vary sharply, yet there is little evidence that forecasters have identified a predictable component of time-varying term premia. [ABSTRACT FROM AUTHOR]

The wealth redistributive effects of retroactive termination insurance together with the difficulty of determining insurance premiums suggest that an alternative response, such as improved disclosure of worker benefits in the event of plan wind-up, may be preferred if the government remains concerned about the security of benefits in underfunded plans. Members of money purchase plans may well be less subject to investment risk than members of defined benefit plans, contrary to the claim of many. In Canada, defined benefit plans appear to have been transformed into defined benefit/money purchase hybrids, and this has several important implications. [ABSTRACT FROM AUTHOR]

The efficiency of the Canadian-U.S. exchange market for the current float is examined more extensively than previously. Semi-strong-form tests which admit the lagged spot rate as a predictor are considered in addition to the standard weak-form test. These stronger tests reject the joint null hypothesis of an efficient exchange market and no risk premium for the period ending in October 1976, although not for the entire period. For almost every year the current spot rate provided a better forecast of the future spot rate than did the current forward rate. [ABSTRACT FROM AUTHOR]

The controversy created by the efficient market hypothesis led to an increasing application of the market model in empirical security price research. The efficiency of the least squares estimators lies on meeting the homoscedasticity assumption. This study investigated and found evidence of heteroscedasticity in the market model using 45 Canadian stocks listed on the Toronto Stock Exchange. [ABSTRACT FROM AUTHOR]

The article examines individual investors in Canada and seeks to show that such persons are better at making investment decisions than is usually thought and to use the theory of the firm for the analysis. Data is derived exclusively from income tax returns and only looks at investments which have produced taxable income. For individual investors, the household budget provides the money to be invested and is therefore examined and compared with business practices. It is also noted that consumer debt rose considerably between 1951 and 1961. Particular interest is paid to lower income people, many of which are retirees.

This study tests the tax-induced trading hypothesis as an explanation of the turn-of-the-year anomaly using Canadian and U.S. intraday data. Since the Canadian tax year-end precedes the calendar year-end by five business days, tax effects may be isolated. We find the anomaly is related to the degree of seller- and buyer-initiated trading and depends upon the incidence of the taxation year-end. Seller-initiated transactions (at bid prices) dominate until the tax year-end after which buyer-initiated trades (at ask prices) dominate. The anomaly is a function of bid-ask prices. [ABSTRACT FROM AUTHOR]

While the U.S. has pursued a vigorous antitrust policy towards horizontal mergers over the past four decades, mergers in Canada have until recently been permitted to take place in a virtually unrestricted antitrust environment. The absence of an antitrust overhang in Canada presents an interesting opportunity to test the conjecture that the rigid market share and concentration criteria of the U.S. policy effectively deters a significant number of potentially collusive mergers. The effective deterrence hypothesis implies that the probability of a horizontal merger being anticompetitive is higher in Canada than in the U.S. However, parameters in cross-sectional regressions reject the market power hypothesis on samples of both U.S. and Canadian mergers. Judging from the Canadian evidence, there simply isn't much to deter. [ABSTRACT FROM AUTHOR]

The Canada Income Tax Act of 1971 permitted Canadian corporations to create two classes of equity, one paying ordinary cash income and the other paying capital gains income. Cash-paying shares have often sold at a premium. Empirical results indicate that the premium is largely explained by the relative value of the dividends paid and by costs imposed on investors by stock dividend payment and share conversion procedures. Premiums for a few firms also reflect the relative liquidity of the two classes of shares. No evidence exists that investors prefer cash income to equal amounts of capital gains. [ABSTRACT FROM AUTHOR]

The Canadian experience in removing the ceiling on federally insured mortgage loans provides a good illustration of the structural implications of the ceiling. After the ceiling was removed, the ratio of the conventional mortgage rate to the NHA rate fell from 112.8 percent to 103.0 percent, indicating that the ceiling provided a benefit of approximately 10 percent of the conventional mortgage rate for NHA borrowers. On the other hand, the ceiling substantially reduced the availability of this credit since the proportion of financial institution mortgage lending for new residential construction that was federally insured almost doubled after the ceiling was removed. Moreover, this reduction in availability fell primarily on low income borrowers since the proportion of NHA loans going to the bottom third of the income distribution rose from approximately 13 percent to 30 percent after the ceiling was removed. Thus, the removal of the rate ceiling on federally insured mortgage loans increased the cost of this credit by approximately 10 percent of the conventional mortgage rate, but substantially increased the availability of this credit, especially for low income borrowers. [ABSTRACT FROM AUTHOR]

We compare initial offer prices in privatizations to initial prices in public offerings of private companies. The evidence indicates that government officials in the United Kingdom underprice IPOs significantly more than their private company counterparts. In Canada and Malaysia, however, the opposite is true. There does not appear to be a general tendency for privatizations to be underpriced to a greater degree than private company IPOs. We provide additional evidence on the determinants of privatization initial returns. Our findings indicate that initial returns are significantly higher in relatively primitive capital markets and for privatized companies in regulated industries. [ABSTRACT FROM AUTHOR]

The article presents an exploration into the domestic economic impact of capital exports. The particular example of direct investment by the United States into Canada is described in detail. Questions of the value of capital exports in times of economic instability are raised. An overview of the existing U.S. subsidies and economic expansions into Canada is provided along with instances of pure cooperative investment. Discussion is also presented regarding the balance between federal policy encouraging or restricting such international finance, or whether social consensus ought to decide the optimal practices.

The article examines the impact of price and interest rate expectations on the demand for money in Canada. The authors present a demand function for money and estimate it in logarithmic fashion using quarterly observations from January, 1955 to December, 1967. Data include yields on Canadian government securities of three different maturities, and two separate measures for money. Results indicate that interest rates and income significantly affect the demand for real cash balances. Expectations for interest rates and prices were also significant factors.

The article presents an overview and analysis of the Canadian "Report of the Royal Commission on Taxation," evaluating the tax system of Canada in regards to welfare economics and neo-Keynesian fiscal theory. The objectives and recommendations of the report are reviewed, outlining the economic goals of horizontal and vertical equity, resource allocation optimality, employment maintenance, and inflation prevention. The author also mentions issues not addressed within the report and their possible implications on policy reform, such as imputed rental income, capital-cost allowances, and charitable contributions.

The article discusses the practice of using auctions to sell long-term government securities in the U.S. and Canada and looks at the benefits and pitfalls of this method. In 1962 the U.S. Treasury tested the auction technique that would identify an underwriting syndicate that bid the most for the securities. In 1960 Canada also used the same auction method and at a time when bond prices were increasing but yields were decreasing.

The article focuses on the life insurance company lending to small business in the United States. It is explained that the investment operations of the United States life insurance industry spread over a wide geographic area, covering the United States, Canada, and, to a small extent, certain other foreign countries. The article discusses how life insurance companies are major lenders to several major markets, including the residential mortgage market, the farm mortgage market, the commercial and industrial mortgage market, and the corporate bond market.

The article presents an overview of Canadian organized securities exchanges, which are different and independent of regional exchanges in the U.S., and are organized around the economic and legal Canadian systems. The authors examine and evaluate the exchange markets for Canadian securities, focusing on how they differ from the U.S. system and how they serve and protect investors. The article addresses the structure of the Canadian exchange, exchange performance, interlistings with U.S. exchange, and investor protection.

The article discusses some of the financial aspects of the government housing program of Canada. Economic indicators clearly shows that the Canadian economy has experienced a high rate of growth, except the housing market. The Dominion Housing Act of 1935 was a legislative attempt to stimulate employment in the residential building industry. The act authorized the government to work with mortgage banks to issue loans. These loans are generally joint loans, which allow the applicant greater borrowing power.

This article discusses the role of fiscal policy in Canada. The article explains that when assessing the role of economic policy, the specific measures selected must be tailored to the country's economic organization, and, in particular, to its monetary and fiscal institutions. It is suggested that the Canadian economy illustrates some of the problems facing "open economies." In Canada policy-makers are forced to consider as alternatives the aim of full employment or relatively free international trade.

The article discusses insights regarding the experience of the United States and Canada with general sales taxation. It is explained that general sales taxation in the United States was a result of the depression of the 1930s and that Canadian provinces, under similar pressure, began entering the sales tax field in 1936. The author explores lessons to be learned regarding such topics as revenue yield, sales tax administration in both the U.S. and Canada, and the shifting of the burden of the sales tax.

The article focuses on the use of deferred depreciation as an anti-inflationary measure in Canada. It is reported that on April 10, 1951, Canada's Minister of Finance, the Honorable Douglas Abbott, announced a plan referred to as deferred depreciation, which is designed to discourage less essential forms of capital expenditure. The article explains the Canadian system of capital cost allowances for tax purposes. Another device used by the Canadian government to stimulate capital expenditures is tax concessions.

The article presents discussion regarding the 1986 article "Integration vs. Segmentation in the Canadian Stock Market," by P. Jorion and E. Schwartz, and the 1977 article "An Empirical Test of the Alternative Hypotheses of National and International Pricing of Risky Assets," by R. Stehle. The author extends the work in these publications on market integration and segmentation hypotheses for the Canadian stock market. The article describes the differences between the Canadian and U.S. stock markets, and the probability for biases in the results.