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Essays on the value of Australian dividends and imputation tax credits

Aelee Jun

This thesis examines the value of Australian dividends and the associated imputation credits. First, the thesis assesses the value of imputation tax credits using the ex-day trading environment of American Depositary Receipts (ADRs) and their underlying Australians stocks. Australian residents are tax-advantaged, relative to American investors, in their access to imputation tax credits on Australian stocks. Consistent with this, there is evidence of a difference in dividend valuations between Australian stocks and their ADRs. The ex-dividend drop-off ratio is higher for Australian stocks relative to their ADRs and this difference is most pronounced for stocks which have imputation tax credits and high dividend yields. Consistent with dividend capture trading in the Australian market, the difference in drop-off ratios is driven by both temporarily higher Australian cum-prices and temporarily lower Australian ex-prices. Abnormal trading volume about the ex-day is present in both markets, and in the Australian market the abnormal volume is greater for dividends with imputation tax credits. The behaviour of prices of the ADR and the stock around the ex-day is also consistent with the presence of dividend-related trading in both markets. Prices of ADRs and their underlying Australian stocks are also compared during the period when, due to different ex-dividend dates, the ADRs and Australian stocks trade with differential dividend entitlements (the DDE period). In the DDE period, prices of the ADR and the stock are found to differ significantly. The value of ADR dividends is estimated using this price difference. These estimates of ADR dividend values are substantially less noisy than traditional ex-dividend estimates. Both the differential entitlement estimates and the ex-dividend estimates indicate that ADR dividends are valued at substantially less than their face value, and that the imputation tax credits attached to the dividend have zero value. In contrast, ex-dividend analysis of the underlying Australian stocks yields significantly higher dividend values that exceed the face value of the dividend and the estimates of the value of imputation tax credits are positive. These results are consistent with the ADRs being held by U.S. investors unable to utilise the imputation tax credits attached to the dividends and the Australian stocks being held or traded by Australian resident investors able to utilise the tax credits. The results are robust to alternative regression specifications and to alternative econometric techniques.

This thesis also examines the role of dividends and franking credits in the portfolios of an important class of investors, namely institutional investors, in the Australian market. The results show that institutions are overweight in stocks that pay dividends. Among dividend paying stocks there is no simple preference for high dividend yields or high dividend payout ratios, but there exists an inverted U relationship between institutional ownership and dividend yield. There is also evidence that the taxation of dividends affects institutional holdings. Institutions tend to have a higher ownership in stocks which carry full imputation tax credits compared to stocks which have partial, or zero, imputation tax credits.


Associate Professor Graham Partington and Dr Max Stevenson