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Relation between franking credits and the market risk premium: a comment

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  • Giang Truong
  • Graham Partington

Abstract

Based on the Officer (1994) model, Gray and Hall (2006) derive a relation between franking credits and the market risk premium. On the basis of this relation, the authors show that traditional estimates of the value of franking credits imply dividend yields that are inconsistent with historical equity market data. This inconsistency arises from assumptions about the franking credit payout ratio and the value of franking credits retained. With less than a 100 per cent payout ratio some franking credits are retained within the firm. Assuming that the retained franking credits have no value leads to the inconsistency in dividend yields. Current practice in the application of Officer's model makes this assumption and, therefore, leads to inconsistent results. Gray and Hall suggest resolving the inconsistency by setting the value of all franking credits to zero. An alternative solution is to recognize that retained franking credits might have a positive value.

Suggested Citation

  • 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.
    • Handle: RePEc:bla:acctfi:v:48:y:2008:i:1:p:153-158
    DOI: 10.1111/j.1467-629X.2007.00236.x
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Fenech, Jean-Pierre & Skully, Michael & Xuguang, Han, 2014. "Franking credits and market reactions: Evidence from the Australian convertible security market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 1-19.
    2. Michael Dempsey, 2015. "Stock Markets, Investments and Corporate Behavior:A Conceptual Framework of Understanding," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number p1007, August.
    3. Kai-Wei (Shaun) Siau & Stephen J. Sault & Geoffrey J. Warren & Henk Berkman, 2015. "Are imputation credits capitalised into stock prices?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 55(1), pages 241-277, March.
    4. 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.

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