The Dividend Substitution Hypothesis: Australian Evidence

32 Pages Posted: 26 Jun 2006

See all articles by Christine A. Brown

Christine A. Brown

Department of Banking and Finance; Financial Research Network (FIRN)

James William O'Day

University of Melbourne - Department of Finance

Date Written: June 2006


Using data prior to the Jobs & Growth Tax Relief Reconciliation Act of 2003 Grullon and Michaely (2002) find that firms in the US are financing repurchases with funds that would otherwise have been used to increase dividends. This finding supports the hypothesis that firms are substituting from dividends towards repurchases. This paper examines the relation between share repurchases and dividend changes in a non-classical tax environment, where dividends are not tax disadvantaged relative to capital gains. We find that repurchase yield is positively related to dividend increases, suggesting that Australian firms are not buying back shares with funds generated by altering dividend policy. Our findings have important implications for our understanding of the effect of taxation on firms' payout policy.

Keywords: payout, imputation, franking, buyback, repurchase, off-market, equal access

JEL Classification: G30, G32, G35

Suggested Citation

Brown, Christine A. and O'Day, James William, The Dividend Substitution Hypothesis: Australian Evidence (June 2006). Available at SSRN: or

Christine A. Brown (Contact Author)

Department of Banking and Finance ( email )

Building 11E
Clayton, Victoria 3800
+61 3 99031793 (Phone)
+61 3 99055475 (Fax)

Financial Research Network (FIRN)

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


James William O'Day

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010

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