A Longitudinal Study of Possible Links between Tax Imputation and Dividend Reinvestment Plans: Australian Evidence

Abstract

This study focuses on the relationship between dividend payout ratio and DRP (Dividend Reinvestment Plan) adoption within the framework of the Australian dividend tax imputation system. Since the decision to adopt the DRP (Dividend Reinvestment Plan) is effected through the distribution of dividends, a longitudinal study of dividend payout ratios and DRP adoptions over time during the sample period (1995-2009), places the DRP decision in the right perspective. We also look at the DRP effect on certain firm characteristics over time using cross-sectional longitudinal data.

The study addresses the binary longitudinal data analysis, using the trend and GEE (General Estimating Equation) approaches, to examine the DRP effect on dividend payout ratio and other firm characteristics. The results of both the trend analysis and GEE approach indicate that DRP decisions are prompted by high dividend payout ratio, low profitability and low liquidity over time. The highly significant time coefficient in GEE estimates shows the longitudinal effect on the DRP decision.

Keywords: Dividend policy: Imputation; Franking credits: Taxes; Tax credit rebate

JEL Classification: G35; H25