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Market Arbitrage of Cash Dividends and Franking Credits

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Author Info
DAVID J. BEGGS
CHRISTOPHER L. SKEELS

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Abstract

Since 1986, dividend imputation has influenced the ex-dividend day behaviour of Australian share prices. This paper explores the effects of dividend imputation on ex-dividend share price drop-off from its inception until mid-2004, with particular attention paid to the differential effects of cash dividends and franking credits. We also explore the effects of the six major legislative amendments to the dividend imputation system that were introduced over the sample period. Only the most recent tax change, which provided full income rebates for unused franking credits, appears to have caused the market to put a statistically significant value on franking credits. Copyright © 2006 The Economic Society of Australia.

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Article provided by The Economic Society of Australia in its journal Economic Record.

Volume (Year): 82 (2006)
Issue (Month): 258 (09)
Pages: 239-252
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Handle: RePEc:bla:ecorec:v:82:y:2006:i:258:p:239-252

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  1. Elton, Edwin J & Gruber, Martin J, 1970. "Marginal Stockholder Tax Rates and the Clientele Effect," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 68-74, February. [Downloadable!] (restricted)
  2. Michaely, Roni & Vila, Jean-Luc, 1996. "Trading Volume with Private Valuation: Evidence from the Ex-dividend Day," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(2), pages 471-509. [Downloadable!] (restricted)
  3. Lakonishok, Josef & Vermaelen, Theo, 1986. "Tax-induced trading around ex-dividend days," Journal of Financial Economics, Elsevier, vol. 16(3), pages 287-319, July. [Downloadable!] (restricted)
  4. Heath, David C & Jarrow, Robert A, 1988. "Ex-dividend Stock Price Behavior and Arbitrage Opportunities," Journal of Business, University of Chicago Press, vol. 61(1), pages 95-108, January. [Downloadable!] (restricted)
  5. Bali, Rakesh & Hite, Gailen L., 1998. "Ex dividend day stock price behavior: discreteness or tax-induced clienteles?," Journal of Financial Economics, Elsevier, vol. 47(2), pages 127-159, February. [Downloadable!] (restricted)
  6. Miller, Merton H & Scholes, Myron S, 1982. "Dividends and Taxes: Some Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1118-41, December. [Downloadable!] (restricted)
  7. Lakonishok, Josef & Vermaelen, Theo, 1983. " Tax Reform and Ex-Dividend Day Behavior," Journal of Finance, American Finance Association, vol. 38(4), pages 1157-79, September. [Downloadable!] (restricted)
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
  9. Murray Frank & Ravi Jagannathan, 1997. "Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes," Staff Report 229, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  10. Black, Fischer & Scholes, Myron, 1974. "The effects of dividend yield and dividend policy on common stock prices and returns," Journal of Financial Economics, Elsevier, vol. 1(1), pages 1-22, May. [Downloadable!] (restricted)
  11. Eades, Kenneth M. & Hess, Patrick J. & Kim, E. Han, 1984. "On interpreting security returns during the ex-dividend period," Journal of Financial Economics, Elsevier, vol. 13(1), pages 3-34, March. [Downloadable!] (restricted)
  12. James M. Poterba & Lawrence H. Summers, 1985. "New Evidence that Taxes Affect the Valuation of Dividends," NBER Working Papers 1288, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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