The Informativeness of Dividends and Franking Credits

Coulton, Jeffrey; Ruddock, Caitlin M. S.; Taylor, Stephen L.

doi:10.2139/ssrn.1982249

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The Informativeness of Dividends and Franking Credits

2012 Financial Markets & Corporate Governance Conference

41 Pages Posted: 10 Jan 2012

See all articles by Jeffrey Coulton

Caitlin M. S. Ruddock

UNSW Australia Business School, School of Accounting

Stephen L. Taylor

University of Technology Sydney; Financial Research Network (FIRN)

Date Written: January 9, 2012

Abstract

We investigate the informativeness of dividends and franking credits with respect to earnings persistence. We find strong evidence that dividend paying firms have more persistent earnings than non-dividend paying firms. Firms that pay franked dividends have significantly more persistent earnings than firms that pay unfranked dividends. Consistent with higher levels of franking identifying more mature firms, fully franked dividend paying firms have significantly less persistent losses than firms that pay partially franked dividends. Market pricing tests show that investors do rationally price earnings persistence once we control for profit compared with loss observations. Our results are robust to alternative model specifications and controlling for dividend size and firm age.

Keywords: earnings persistence, dividends, franking credits

JEL Classification: G11, G35, M41

Suggested Citation: Suggested Citation

Coulton, Jeffrey J. and Ruddock, Caitlin M. S. and Taylor, Stephen L., The Informativeness of Dividends and Franking Credits (January 9, 2012). 2012 Financial Markets & Corporate Governance Conference, Available at SSRN: https://ssrn.com/abstract=1982249 or http://dx.doi.org/10.2139/ssrn.1982249