Prime and Score Premia: Evidence against the Tax-Clientele Hypothesis

Abstract

Primes and scores split the cash flows of a share of stock into dividend and capital gain components, respectively. An analysis of transaction prices reveals that the sum of prime and score prices exceeds the price of their underlying stock. This paper develops a tax-clientele explanation of this premium over the stock price. It tests jointly the clientele effect and an after-tax version of the Black-Scholes option pricing formula. The data reject this joint hypothesis in a manner that suggests the tax-clientele model is not supported.