Do Franking Credits Matter? Exploring the Financial Implications of Dividend Imputation

42 Pages Posted: 3 Jun 2015

See all articles by Andrew Ainsworth

Andrew Ainsworth

University of Wollongong - School of Accounting, Economics & Finance; Financial Research Network (FIRN)

Graham Partington

University of Sydney - School of Business - Finance Discipline; Financial Research Network (FIRN)

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics

Date Written: June 1, 2015

Abstract

We examine the implications of the imputation system for stock prices and returns, cost of capital, project evaluation, capital structure, payout policy and investor portfolios. We also discuss potential impacts if the imputation system was dismantled or adjusted, perhaps in conjunction with a reduction in the corporate tax rate. A key theme is that the financial effects of imputation are often contentious. Most notably, the impact of imputation credits on share prices and cost of capital is subject to much debate: the notion that imputation is not priced is an extreme position, and an unreliable basis for policy formulation. More attention should be afforded to how imputation influences the behaviour of investors and companies. In this respect, the incentive that imputation provides for increasing dividend payouts is one of its clearest effects; and a key benefit through enhancing discipline in the use of capital. The effects of any removal of imputation are likely to be felt most strongly among smaller, domestic companies.

Suggested Citation

Ainsworth, Andrew and Partington, Graham and Warren, Geoffrey J., Do Franking Credits Matter? Exploring the Financial Implications of Dividend Imputation (June 1, 2015). CIFR Paper No. 058/2015. Available at SSRN: https://ssrn.com/abstract=2613186 or http://dx.doi.org/10.2139/ssrn.2613186

Andrew Ainsworth

University of Wollongong - School of Accounting, Economics & Finance ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia

Financial Research Network (FIRN)

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

HOME PAGE: http://www.firn.org.au

Graham Partington

University of Sydney - School of Business - Finance Discipline ( email )

Building H69
Sydney NSW, 2006
Australia

Financial Research Network (FIRN)

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

HOME PAGE: http://www.firn.org.au

Geoffrey J. Warren (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )

CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia

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