The value of dividends: Evidence from cum‐dividend trading in the ex‐dividend period

Abstract

What is the market value of a dollar of fully franked dividends? We address this question by exploiting a new phenomenon in the Australian capital market Ðthe trading of shares cum-dividend during the ex-dividend period. This allows a relatively clean measurement of the combined value of dividends and the associated tax effects net of transactions costs. Consistent with the theoretical model that we develop, the evidence from this sample is that one dollar of fully franked dividends, after tax effects and transaction costs, is worth significantly more than one dollar. We also show that, in contrast to our measure, the traditional measure of the ex-dividend price drop-off, based on close to close prices, has a lower average value and exhibits substantially more cross sectional variation.

Ownership structure and tax-friendly dividends

“…5 Walker and Partington (1999), Cannavan et al (2004) and Beggs and Skeels (2006) all conclude that imputation (franking) credits are valuable for shareholders, on average, although estimates of the value of $1 of franking credits vary greatly across the studies. Cannavan et al (2004), however, find that this value disappeared after the legislative change in 1997 requiring shares to be held for at least 45 days around the date of dividend entitlement for franking credits to be accessible, leading to the conclusion that the marginal investor in their sample of Australian companies was a non-resident shareholder unable to extract benefits from imputation credit receipt.…”

Share Buybacks and Shareholder Equity

“…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)). …”

Cost of capital equations under the Australian imputation tax system

“…How should the tax effects, transactions costs and discounting effects be allocated in separating the package value into dividend and franking components? In Walker and Partington (1999), the personal tax effects, discounting effects and transactions costs are implicitly allocated to the valuation of the cash component of dividends. In contrast, Cannavan et al (2004) implicitly address the allocation by assuming that the cash component of the © The Authors Journal compilation © 2007 AFAANZ dividend is fully valued.…”

“…However, due to the 1 day gap between observation of cum-dividend and ex-dividend prices, measurements of q are extremely noisy (Walker and Partington, 1999). The interpretation of ex-dividend studies is also problematic.…”

“…Walker and Partington (1999) study cum-dividend trading in the ex-dividend period and obtain measures of q that are consistently greater that 1 for fully franked dividends.…”