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Market Arbitrage of Cash Dividends and Franking Credits

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Author Info
D. Beggs
C.L. Skeels

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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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File URL: http://www.economics.unimelb.edu.au/SITE/research/workingpapers/wp05/947.pdf
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Publisher 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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Related research
Keywords: Dividend imputation; cash dividends; franking credits; drop-off ratio; tax legislation; structural breaks.;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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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. 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. [Downloadable!] (restricted)
  6. 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)
  7. 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)
  8. 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)
  9. 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)
  10. 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)
  11. 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)
  12. 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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  13. 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)
    Other versions:
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