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12AbstractThisresearchcoversthelistedcompaniestradedinTaiwanStockExchange(TSE).Theresearchperiodisdividedintotwosub-periodsbyTaiwan’s1998TaxReform.Oneisrangedfrom1993to1997andtheotherisrangedfrom1998to1999.WeuseHarris,Hubbard,andKemsley(2001)modelasourresearchmethodandmodifyitaccordingtoTaiwan’srealcondition.Themainpurposeofthispaperistoexaminetherelationshipbetweenretainedearningsandstockprices.Wealsoexaminetheelectronicsindustryseparatelytoobtainmorecompleteresults.WefindthatinvestorsofthelistedcompaniesinTSEvalueretainedearningsdifferentlybeforeandaftertheTaxReform.AftertheTaxReformtheretainedearningsaremorerelevanttostockpriceswhichmeansthataftertheTaxReforminvestorstakeretainedearningsintoconsiderationwhilemakinginvestmentdecisions.ButtheresultoftheelectronicsindustryanalysisshowstheoppositewhichmeansthattheretainedearningsbeforetheTaxReformaremorerelevantandtherelationshipbetweenretainedearningsandthestockpricesisweakenedaftertheTaxReform.Ourresultsuggeststhat1998TaxReformhaschangedtheinvestors’valuationofretainedearnings.Keywords:Dividendtaximputation,Retainedearnings,Valuerelevance,Businessvaluation.3(timeseries)(crosssection)(pooledregression)Harris,Hubbard,andKemsley(2001)4.........................................................................1.........................................................................2.......................................................3...................................................................5................................................................15......................................................21..............................................................24........................................................................27.....................................................................29.........................................................................31................................................................................41.....................................................................44..........................................................................4654-1..............................................................294-2OLS.......................................314-3OLS..........................................334-4OLS...............................334-5GLS.......................................364-6GLS..........................................374-7GLS...............................381272MillerandScholes1978taxpenalty1.32.45(taxeffect)EltonandGruber(1970)EltonandGruberEltonandGruber(PB-PA)/D=(1-t0)/(1-tc)PBPADt0()tc6EltonandGruber(clienteleeffect)LitzenbergandRamaswamy(1979)Brennan(1970)(aftertaxCapitalAssetPricingModelaftertaxCAPM)Brennan19361977LitzenbergandRamaswamy1123%LitzenbergandRamaswamyBarclay(1987)EltonandGruber1913(FederalIncomeTax)Barclay(19001910)(19621985)7(taxclienteleeffect)LamdinandHiemstra(1993)1986(TaxReformActTRA1986)19821991CRSP(CenterforResearchinSecurityPrices)41,561LamdinandHiemstraEltonandGruber(1970)Barclay(1987)TRA1986(PB-PA)/D()TRA1986(PB-PA)/D11LamdinandHiemstra19821986(PB-PA)/D()0.885(0.92)19871991(PB-PA)/D()0.918(0.987)19861987(PB-PA)/D()0.921(1.001)0.986(1.077)TRA198650%~70%28%~39.6%TRA1986LamdinandHiemstraTRA19868Lasfer(1995)1985461994451988(IncomeandCorporateTaxAct1988ICTA)1988ICTA60%40%(30%)1988ICTALasfer19881988198810,12319882,89119887,232Lasfer198819881988198519870.46%19880.3%Lasfer1988(tradingpractice)LasferLasfer(1995)LitzenbergandRamaswamy(1979)CAPMEltonandGruber(1970)Eades,Hess,andKim(1984)Eades,Hess,andKim(NYSE)919741980()Eades,Hess,andKim(1)(2)(3)(4)Eades,Hess,andKim(taxpremium)Eades,Hess,andKim()Eades,Hess,andKim(anomaly)GordonandBradford(1980)(CAPM)GordonandBradford19261978MillerandScholes(1982)MillerandScholes10MillerandScholesMillerandScholestaxpenaltyMillerandScholesBlackandScholes(1974)19471966BlackandScholesBlackandScholesGordonandBradford(1980)MillerandScholes(1982)BlackandScholes(1974)RosenbergandMarathe(1979)BlackandScholes(1974)(1)BlackandScholes(2)BlackandScholes(OrdinaryLeastSquaresOLS)11RosenbergandMarathe(two-stageGeneralizedLeastSquarestwo-stageGLS)0LitzenbergandRamaswamy(1982)Tax-ClienteleCAPMLitzenbergandRamaswamyLitzenbergandRamaswamyMillerandScholes(1981)(informationeffect)PoterbaandSummers(1984)19551981196530%1973PoterbaandSummers195519651965197319731981(16)(3,500)PoterbaandSummersCAPMChen,Grundy,andStambaugh(1990)Fama12andFrench(1998)Chen,Grundy,andStambaugh(1990)Chen,Grundy,andStambaughChen,Grundy,andStambaugh(PREMt)Chen,Grundy,andStambaughFamaandFrench(1998)19651992CompustatFamaandFrenchFamaandFrenchFamaandFrench(nettaxbenefit)FamaandFrench(proxy)13HarrisandKemsley(1999)Harris,Hubbard,andKemsley(2001)Harris,Hubbard,andKemsley(2001)HarrisandKemsley(1999)Harris,Hubbard,andKemsley(2001)HarrisandKemsley(1999)Ohlson’s(1995)residualincomevaluationmodel1975199427,647(firm-year)HarrisandKemsleyPit=0+1BVit+2REit+3NIit+4REBVitNIit+itPititBVititREititNIititREBVititHarrisandKemsleyTRA1986HarrisandKemsleyTRA1986(taxdiscount)14-0.45(