The Value of Imputation Tax Credits on Australian Hybrid Securities

Abstract

Hybrid securities are becoming an increasingly important component of the capital structure of Australian firms. While displaying characteristics of both debt and equity, one principal equity attribute of hybrids is their ability to pay franked dividends. This enables resident domestic investors to claim corporate tax payments as a credit against personal tax obligations under Australia's dividend imputation tax system. This paper estimates a value for the 'franking credits' that attach to hybrid securities by examining stock price changes around ex-dividend dates. We add to the literature that examines the ex-day price changes of ordinary shares (OS) in that the hybrid securities we examine have high dividend yields and are relatively insensitive to market movements. Therefore the signal-to-noise ratio is much higher than for OS. Our analysis reveals that cum-dividend day prices on hybrid securities do not include any value for franking credits. This result is consistent with the notion that the price-setting investor in the Australian market is a foreign investor who places no value on franking credits. Copyright (c) 2010 The Authors. International Review of Finance (c) International Review of Finance Ltd. 2010.

Taxes, International Clienteles and the Value of ADR Dividends

“…Using GLS estimates on real data they conclude that imputation credits have no value. Examining the price of hybrid securities about ex-dividend events, Feuerherdt et al (2010) provide further evidence that franking credits have no value.…”

“…Examining the price of hybrid securities about ex‐dividend events, Feuerherdt et al. () provide further evidence that franking credits have no value.…”

“…(), Bellamy and Gray () and Feuerherdt et al. () all argue that the imputation credits have zero value. They argue that this is because the price of dividends is set by a clientele of international investors who cannot extract value from the credits.…”

“…In contrast to Cannavan et al (2004), Cummings and Frino estimate imputation tax credits to be worth approximately 54% of their face value. Cannavan et al (2004), Bellamy and Gray (2004) and Feuerherdt et al (2010) all argue that the imputation credits have zero value. They argue that this is because the price of dividends is set by a clientele of international investors who cannot extract value from the credits.…”

Home bias and cross border taxation

“…composition of outbound capital flows. Feuerherdt et al (2010) estimate a value for the franking credits that attach to hybrid securities by examining stock price changes around ex-dividend date. They find that cum-dividend day prices on hybrid securities do not include any value for franking credits.…”