The Informativeness of Dividends and Franking Credits
UNSW Business School
Caitlin M. S. Ruddock
UNSW Australia Business School, School of Accounting
Stephen L. Taylor
UNSW Australia Business School, School of Accounting; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)
January 9, 2012
2012 Financial Markets & Corporate Governance Conference
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.
Number of Pages in PDF File: 41
Keywords: earnings persistence, dividends, franking credits
JEL Classification: G11, G35, M41
Date posted: January 10, 2012
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