Market Arbitrage of Cash Dividends and Franking Credits
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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