The value of dividend imputation tax credits in Australia

Cannavan, Damien; Finn, Frank; Gray, Stephen

doi:10.1016/j.jfineco.2003.09.001

Cited by 89 publications

(96 citation statements)

References 21 publications

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“…Empirical studies have led to conflicting results that place the value of γ at anything from close to unity (Walker and Partington (1999)) to close to zero (Cannavan, Finn and Gray (2004)). …”

Section: The Resultsmentioning

confidence: 99%

Share Buybacks and Shareholder Equity

Brown

Davis

2006

SSRN Journal

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Off market share buybacks by Australian companies have involved complicated tax arrangements which generally lead to participation only by low marginal tax rate shareholders. This has led to many commentators raising questions in the financial press about equitable treatment of shareholders. We develop a simple model which enables us to derive a method of assessing whether buyback terms are equitable across shareholder groups which is then used to examine the Australian data. Definitive results hinge upon the contentious issue of the market value ascribed to franking credits, but it appears that buyback characteristics have meant a transfer of corporate value in favour of low marginal tax rate shareholders at the expense of high marginal tax rate shareholders.

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Section: The Resultsmentioning

confidence: 99%

Share Buybacks and Shareholder Equity

Brown

Davis

2006

SSRN Journal

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“…As well, the median after-tax loss of 31.5% is equal to the median pre-tax loss experienced by all unit-holders of the SIFT securities and cannot be separated from that effect. A generalized result on marginal investors could only be made via an assumption that the announcement had no other valuation effect in the market, as was the case in the referenced Australian study by Cannavan, Finn, and Gray (2004). The mean after-tax losses of approximately 10% across all tax levels indicate that this is not the case.…”

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confidence: 97%

Improving Municipal Information and Knowledge Management Capabilities: Case Study

Ekionea

Fillion

Koffi

2012

J. Info. Know. Mgmt.

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AcknowledgementsThere is a great deal of work to coordinate and administer all of the activities of the Atlantic Schools of Business Conference. In particular, the coordination of activities from the call for papers to the acceptance process is very extensive. We would like to thank the many people involved to help us with this central aspect of the conference. Thanks to Ms. Amanda Strongman who took on the initiative and perseverance to automate the paper submission process using Easy Chair this year. The use of this tool provided many insights from an organizing perspective that were invaluable. We would also like to thank the track chairs (see next section for a track chair list) who provided timely and helpful feedback about how to improve the process and managed the review process for the papers submitted to their tracks. Their commitment to getting reviews for all papers and providing feedback to authors involved an immense amount of work which we are thankful they took on. Finally, we would like to thank all the reviewers who took the time to review papers in their area of expertise and offer constructive feedback to authors to help improve their work. This process relies on volunteers from across the region. We are grateful that the spirit of academic development and achievement is alive and well! Your contributions in this area make the ASB conference possible! Sincerely, Wendy R. Carroll Conference Chair Atlantic Schools of Business Executive Stream PageAccounting 1 Business Communications 13 Business History 50Finance 84 Human Resources and Industrial Relations 197 Information Systems 258 Management Education 307Marketing 323 Organizational Theory 384Strategy 430 ASB Conference 2011 Proceedings Accounting StreamUniversity of PEI IntroductionCorporate Social Responsibility (CSR) has received growing attention in the last several decades. Its impact dramatically reached the top echelons of the United Nations when UN Secretary-General Kofi Annan proposed The Global Compact at the World Economic Forum in Davos, Switzerland in 1999 (Bitanga and Bridwell, 2010). The Global Compact has grown to encompass more than 8,700 corporate participants and others stakeholders, including over 7,700 businesses in 130 countries around the world (United Nations Global Compact, 2011a).The UN Global Compact is a voluntary initiative that relies on public accountability, transparency, and enlightened corporate self-interest. The basic idea is that the voluntary involvement of companies in the areas of human rights, labor rights, environmental degradation, and anti-corruption can encourage private innovation and concern within these areas in a manner that regulation has been unable to adequately achieve, thereby hastening the emergence of a more sustainable and just future (Kell and Levin, 2002).The benefits for companies voluntarily affiliating with the UN Global Compact have been little documented from an empirical perspective. A survey by Cetindamar and Husoy (2007) documented the motivations of some firms for adherin...

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“…2 See Twite and Wood (1997), Cannavan, Finn and Gray (2004), Strategic Finance Group (SFG) (2013b) and Cannavan (2013) 3 Under a classical tax system, dividends are taxed at both the corporation and shareholder level.…”

Section: Institutional Backgroundmentioning

confidence: 99%

“…The first is to provide an accurate estimate of the market value of imputation credits. We use an iteration of the costly no-arbitrage framework developed in Cannavan, Finn and Gray (2004) (CFG) to determine what influence, if any, short-term traders and dividend-capturers have on implied values of imputation credits in futures prices 1 . We then attempt to tease out the activity of this type of investor in order to accurately estimate the value placed on a dollar of imputation credits by long-term providers of equity.…”

Section: Introductionmentioning

confidence: 99%

The impact of dividend-capturing arbitrage on the market value of imputation credits

Muspratt¹

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A growing body of literature has attempted to determine the market value of a dollar of imputation credits (theta). By observing the market prices of securities around the ex-dividend date, these studies have consistently estimated that theta is significant and positive. Another subset of literature however, has consistently found that imputation credits do not affect a firm's cost of capital, and are not capitalised into stock prices. These conflicting results provide a puzzle within the literature. We theorise, and then empirically show, that the values of theta observed in prices around the ex-dividend date are inflated upwards by the activity of short-term traders and arbitrageurs. Once we exclude their activity from our analysis, we use a considerable sample of 200,000 observations, to show that the market value of imputation credits is insignificantly different from zero. These results provide us with evidence that, consistent with the cost-of-capital literature, long-term providers of equity place no value on imputation credits. Our results therefore act to bridge the gap between these two areas of research, and solve the puzzle that exists within the literature.The fact that these imputation credits are priced into futures contracts at a value far below their face value also raises the question: are domestic investors able to exploit this low value by simultaneously entering into two opposing positions -a long position in the company's stock, and a short position in a futures contract to sell the stock after the ex-dividend date -and successfully generate arbitrage profits? We find that this dividend-capturing arbitrage strategy has been able to consistently produce significant, abnormal returns over our 19 year sample period. We find that even after incorporating explicit transaction costs and collateral requirements, a small domestic investor is able to generate between 0.86% and 2.83% monthly abnormal returns with the top 10 percent of profitable observations in financial year 2014.iii

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The value of dividend imputation tax credits in Australia

Cited by 89 publications

References 21 publications

Share Buybacks and Shareholder Equity

Share Buybacks and Shareholder Equity

Improving Municipal Information and Knowledge Management Capabilities: Case Study

The impact of dividend-capturing arbitrage on the market value of imputation credits

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