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Market Arbitrage of Cash Dividends and Franking Credits

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  • D. Beggs
  • C.L. Skeels

Abstract

Since 1986 dividend imputation has influenced the ex-dividend day behaviour of Australian share prices. Between 1 April 1986 and 30 May 2004 the Government of the day introduced six major legislative amendments intent on improving the efficiency of the dividend imputation system. This paper explores the impact of dividend imputation, in its various forms, on ex-dividend share price adjustments. We find that 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.

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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 947.

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Length: 27 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:mlb:wpaper:947

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Web page: http://www.economics.unimelb.edu.au
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Keywords: Dividend imputation; cash dividends; franking credits; drop-off ratio; tax legislation; structural breaks.;

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References

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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.
  2. Karpoff, Jonathan M. & Walkling, Ralph A., 1988. "Short-term trading around ex-dividend days : Additional evidence," Journal of Financial Economics, Elsevier, vol. 21(2), pages 291-298, September.
  3. Poterba, James M & Summers, Lawrence H, 1984. " New Evidence that Taxes Affect the Valuation of Dividends," Journal of Finance, American Finance Association, vol. 39(5), pages 1397-1415, December.
  4. Lakonishok, Josef & Vermaelen, Theo, 1986. "Tax-induced trading around ex-dividend days," Journal of Financial Economics, Elsevier, vol. 16(3), pages 287-319, July.
  5. 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.
  6. Frank, Murray & Jagannathan, Ravi, 1998. "Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes," Journal of Financial Economics, Elsevier, vol. 47(2), pages 161-188, February.
  7. Heath, David C & Jarrow, Robert A, 1988. "Ex-dividend Stock Price Behavior and Arbitrage Opportunities," The Journal of Business, University of Chicago Press, vol. 61(1), pages 95-108, January.
  8. Michaely, Roni & Vila, Jean-Luc, 1996. "Trading Volume with Private Valuation: Evidence from the Ex-dividend Day," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 471-509.
  9. 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.
  10. Milonas, Nikolaos T. & Travlos, Nickolaos G. & Xiao, Jason Zezhong & Tan, Cunkai, 2006. "The ex-dividend day stock price behavior in the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 14(2), pages 155-174, April.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
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Cited by:
  1. Henry, Darren, 2011. "Ownership structure and tax-friendly dividends," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2747-2760, October.

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