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Investment, the Corporate Tax Rate, and the Pricing of Franking Credits

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  • Peter L. Swan

Abstract

I apply a new single‐pass capital asset pricing model methodology for assessing systematic risk to all ASX stocks which indicates that securities which pay franking credits in Australia appear to face far less systematic risk than do stocks that never pay franking credits. But in this context, this apparent reduction in systematic risk can be interpreted as being due to franking credits that are close to being fully priced. An efficient equilibrium is reached in which the marginal investor in Australia pays little or no Australian corporate tax because, once she exhausts compulsory savings, she borrows offshore and converts debt to equity.

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  • Peter L. Swan, 2019. "Investment, the Corporate Tax Rate, and the Pricing of Franking Credits," The Economic Record, The Economic Society of Australia, vol. 95(311), pages 480-496, December.
    • Handle: RePEc:bla:ecorec:v:95:y:2019:i:311:p:480-496
    DOI: 10.1111/1475-4932.12493
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    Cited by:

    1. Simshauser, P., 2022. "On dividends and market valuations of Australia’s listed electricity utilities: regulated vs. merchant," Cambridge Working Papers in Economics 2229, Faculty of Economics, University of Cambridge.
    2. John Freebairn, 2022. "Company Income Tax and Business Investment," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 55(3), pages 346-360, September.
    3. Paul Simshauser, 2022. "On dividends and market valuations of Australia’s listed electricity utilities: regulated vs. merchant," Working Papers EPRG2210, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    4. John Freebairn, 2018. "Effective Tax Rates on Different Corporate Investments," Department of Economics - Working Papers Series 2039, The University of Melbourne.
    5. Simshauser, Paul, 2023. "On dividend policy and market valuations of Australia’s listed electricity utilities: Regulated vs. merchant," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 696-715.
    6. Janine M. Dixon & Jason Nassios, 2018. "A Dynamic Economy-wide Analysis of Company Tax Cuts in Australia," Centre of Policy Studies/IMPACT Centre Working Papers g-287, Victoria University, Centre of Policy Studies/IMPACT Centre.
    7. Anh Le & Xiangkang Yin & Jing Zhao, 2022. "The Capitalization Effect of Imputation Credits on Expected Stock Returns," Abacus, Accounting Foundation, University of Sydney, vol. 58(3), pages 523-566, September.
    8. David Rodgers & Jonathan Hambur, 2018. "The GFC Investment Tax Break," RBA Research Discussion Papers rdp2018-07, Reserve Bank of Australia.

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