The Market Value of Dividend Imputation Credits Implied by Futures Prices

15 Pages Posted: 31 Jul 2017 Last revised: 9 Jul 2019

See all articles by Damien Cannavan

Damien Cannavan

Financial Research Network (FIRN)

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

Date Written: July 7, 2019

Abstract

A limitation of prior research on imputation credit value is researchers’ selective interpretation of the regression coefficient used to estimate credit value. This ignores the in-sample evidence on the value of cash dividends and the value of a fully-franked dividend. This is a problem because a sample of security prices, unfranked dividends and franked dividends necessarily leads to the simultaneous estimation of the value of a cash dividend and an imputation credit. We measure the value of imputation credits under three tax regimes, accounting for the joint estimation of the value of cash and credits.

The practical implication is that in the cash rebate regime, the market value of imputation credits lies within the range of -0.12 to 0.17. A dollar of cash is valued by the market at somewhere between 88 cents and 98 cents. At the lower end of the cash value (0.88), credits are worth between 0.04 and 0.17; and at the higher end of cash value (0.98), credits are worth between -0.12. and 0.00. The value of imputation credits has, in our view, moved over time in a direction consistent with changing tax treatment. But it is plausible that the value of imputation credits has remained within the range of -0.04 to 0.06 across all three tax regimes.

Keywords: Imputation credits, cost of capital, regression, collinearity

JEL Classification: G12

Suggested Citation

Cannavan, Damien and Gray, Stephen and Hall, Jason L., The Market Value of Dividend Imputation Credits Implied by Futures Prices (July 7, 2019). 30th Australasian Finance and Banking Conference 2017. Available at SSRN: https://ssrn.com/abstract=3009820 or http://dx.doi.org/10.2139/ssrn.3009820

Damien Cannavan (Contact Author)

Financial Research Network (FIRN) ( email )

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