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Relationship between franking credits and the market risk premium: a reply

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  • Stephen Gray
  • Jason Hall

Abstract

We have previously documented an inconsistency between the dividend yield implied by the Officer (1994) model with standard Australian regulatory parameters and actual dividend yields of Australian companies. We have shown that, within the Officer framework, this inconsistency can be resolved by setting the assumed value of franking credits (γ) to zero, consistent with the practice of Australian firms and independent valuation experts. Truong and Partington (2008) and Lally (2008) recognize this same inconsistency and propose alternate ways of resolving it. In this paper, we demonstrate that these proposals are outside the Officer framework. The standard set of regulatory parameters cannot be resolved with observed dividend yields within the Officer framework. Whichever method is used to resolve the inconsistency, the effect will be an increase in the estimated after‐tax cost of equity.

Suggested Citation

  • Stephen Gray & Jason Hall, 2008. "Relationship between franking credits and the market risk premium: a reply," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(1), pages 133-142, March.
    • Handle: RePEc:bla:acctfi:v:48:y:2008:i:1:p:133-142
    DOI: 10.1111/j.1467-629X.2007.00243.x
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    File URL: https://doi.org/10.1111/j.1467-629X.2007.00243.x
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    References listed on IDEAS

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    1. Martin Lally, 2008. "Relationship between franking credits and the market risk premium: a comment," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(1), pages 143-151, March.
    2. Stephen Gray & Jason Hall, 2006. "Relationship between franking credits and the market risk premium," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(3), pages 405-428, September.
    3. Giang Truong & Graham Partington, 2008. "Relation between franking credits and the market risk premium: a comment," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(1), pages 153-158, March.
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    Cited by:

    1. 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.
    2. 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.
    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.

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