Market arbitrage of cash dividends and franking credits

Abstract

Since 1986, dividend imputation has influenced the ex-dividend day behaviour of Australian share prices. This paper explores the effects of dividend imputation on ex-dividend share price drop-off from its inception until mid-2004, with particular attention paid to the differential effects of cash dividends and franking credits. We also explore the effects of the six major legislative amendments to the dividend imputation system that were introduced over the sample period. Only the most recent tax change, which provided full income rebates for unused franking credits, appears to have caused the market to put a statistically significant value on franking credits. © 2006 The Economic Society of..