The Value of Imputation Tax Credits on Australian Hybrid Securities

37 Pages Posted: 25 Aug 2010

See all articles by Clinton Feuerherdt

Clinton Feuerherdt

Investec

Stephen Gray

University of Queensland - Business School; Duke University - Fuqua School of Business; Financial Research Network (FIRN)

Jason Hall

University of Michigan, Stephen M. Ross School of Business

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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.

Suggested Citation

Feuerherdt, Clinton and Gray, Stephen and Hall, Jason L., The Value of Imputation Tax Credits on Australian Hybrid Securities. International Review of Finance, Vol. 10, No. 3, pp. 365-401, September 2010. Available at SSRN: https://ssrn.com/abstract=1664731 or http://dx.doi.org/10.1111/j.1468-2443.2010.01117.x

Clinton Feuerherdt (Contact Author)

Investec ( email )

Level 31, Riparian Plaza
71 Eagle Street
Brisbane, Queensland 4000
Australia

Stephen Gray

University of Queensland - Business School ( email )

University of Queensland
Brisbane, Queensland 4072
Australia

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Jason L. Hall

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street, Ross School of Business
University of Michigan
ANN ARBOR, MI MI 48104
United States
+1 734 926 6989 (Phone)

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