Relation between franking credits and the market risk premium: a comment

Based on the Officer (1994) model, Gray and Hall (2006) derive a relation between franking credits and the market risk premium. On the basis of this relation, the authors show that traditional estimates of the value of franking credits imply dividend yields that are inconsistent with historical equity market data. This inconsistency arises from assumptions about the franking credit payout ratio and the value of franking credits retained. With less than a 100 per cent payout ratio some franking credits are retained within the firm. Assuming that the retained franking credits have no value leads to the inconsistency in dividend yields. Current practice in the application of Officer's model makes this assumption and, therefore, leads to inconsistent results. Gray and Hall suggest resolving the inconsistency by setting the value of all franking credits to zero. An alternative solution is to recognize that retained franking credits might have a positive value.     

Relationship between franking credits and the market risk premium

In a dividend imputation tax system, equity investors have three potential sources of return: dividends, capital gains and franking (tax) credits. However, the standard procedures for estimating the market risk premium (MRP) for use in the capital asset pricing model, ignore the value of franking credits. Officer (1994) notes that if franking credits do affect the corporate cost of capital, their value must be added to the standard estimates of MRP. In the present paper, we explicitly derive the relationship between the value of franking credits (gamma) and the MRP. We show that the standard parameter estimates that have been adopted in practice (especially by Australian regulators) violate this deterministic mathematical relationship. We also show how information on dividend yields and effective tax rates bounds the values that can be reasonably used for gamma and the MRP. We make recommendations for how estimates of the MRP should be adjusted to reflect the value of franking credits in an internally consistent manner.     

Relationship between franking credits and the market risk premium: a comment

This paper examines two arguments presented in Gray and Hall (2006). First, that the generally used estimate of 0.06 for the market risk premium within the Officer version of the capital asset pricing model (CAPM) and the generally used estimate of 0.50 for the parameter ‘gamma’ within the Officer framework are jointly inconsistent with evidence concerning the market risk premium in the standard version of the CAPM. Second, that the first two of these parameter estimates are also jointly inconsistent with the observed cash dividend yield on the Australian market. To resolve these problems, Gray and Hall recommend setting gamma to zero. The present paper shows that the first argument does not account for the fact that imputation induces a reduction in the market risk premium as defined in the standard version of the CAPM. The present paper also shows that both arguments identify a problem that characterizes only parts of the Officer framework, and these parts are not generally used in Australia. Therefore, rather than suggesting that gamma should be zero, Gray and Hall's analysis identifies parts of the Officer framework that should be avoided.     

半强制股利政策与股权融资成本

在一些国家,强制股利支付是改善公司治理和弥补法律保护不足的重要手段,我国自2001年起陆续出台了类似的半强制股利系列政策。然而现有部分研究却发现,半强制股利政策可能会产生监管“悖论”。那么,事实是否如此？以往这些研究主要从监管成本角度来分析,可能忽视了监管带来的收益,我们认为虽然半强制股利政策提高了融资门槛,但也可能实现股东之间的利益共享,并有利于投资者形成稳定的股利预期,从而实现治理的“溢价”。本文利用2008年监管政策提供的良好自然实验机会,主要从半强制股利政策的治理效应角度来评估政策产生的经济后果。研究发现,从总体平均意义上看,半强制股利政策有助于降低受影响公司的股权融资成本。进一步研究发现,在代理成本高的公司,半强制股利政策的治理作用更为明显,存在一定的治理“溢价”。当然,半强制股利政策也存在一定的局限性,在公司的信息披露质量差和外部融资约束较大的公司,半强制股利政策的治理效应被削弱。     

Initial Public Offerings in Australia 1994 to 1999, Recent Evidence of Underpricing and Underperformance

This paper analyses whether financial and non financial characteristics of Australian initial public offerings (IPOs) can explain observed underpricing and long term underperformance over the period 1994 to 1999. A number of previous Australian studies have investigated initial day underpricing and longer term underperformance of IPOs and this study updates those papers. We find that initial day underpricing can in part be explained by market sentiment, forecast dividend per share yields, underwriter options and share options. Our longer term analysis supports the finding of previous studies in that IPOs on average, underperform the market in the first year following their listing.     

The Conceptual Framework as a Coherent System for the Development of Accounting Standards

The Financial Accounting Standards Board (FASB) visualized a conceptual accounting framework as a 'coherent system of interrelated objectives and fundamentals that can lead to consistent standards that prescribes the nature, function, and limits of financial accounting and financial statements' (FASB, 1976). To Australian standard setters, the primary purpose of the conceptual framework (CF) was only to be used as a 'guide' in developing and reviewing accounting standards (AASB, 1995, para. 5). The International Accounting Standards Committee (IASC) diminished the role of a conceptual framework even further by openly acknowledging that some standards are inconsistent with the guidelines offered by the framework (IASC, 1989 para. 12). Even though the Australian Accounting Standards Board (AASB) supposedly pursues a policy of harmonization of conceptual frameworks and accounting standards, there are also acknowledged inconsistencies in the conceptual frameworks of the IASC.
The aim of this article is to assess the coherence of the Australian (and IASC) conceptual framework. This analysis identifies confusion in drafting or construction of the conceptual framework, internal inconsistencies, and inconsistency with the legal framework within which business entities operate. Accordingly it is suggested that the adoption of a conceptual framework will not lead to consistent accounting standards, and inevitably the conceptual framework will lack credibility so long as it is inconsistent with legislation.     

DIVIDEND POLICY AND CAPITAL STRUCTURE UNDER THE IMPUTATION TAX SYSTEM: SOME CLARIFYING COMMENTS

This paper analyses the effects of the imputation and capital gains taxes on the dividend and financing decisions of Australian companies. We develop a framework, consistent with Miller's [1977] approach, in which interactions between dividend and financing decisions can be explored. The significance of these interactions depends on both corporate dividend policy and on the relationship between personal and corporate income tax rates. We conclude that under imputation, dividend decisions are more important relative to capital structure decisions, than under the classical tax system.     

Evaluating managed fund performance using conditional measures: Australian evidence

Most studies of managed fund performance use measures that are susceptible to bias caused by common time variation in risks and risk premia. We evaluate the performance of Australian managed funds 1983–1995 using lagged public information variables that have been shown to predict stock returns, such as interest rates and dividend yields, to control for the variation. The results indicate an improvement in performance relative to traditional measures and confirm the importance of using conditioning information, especially dividend yield, in performance evaluation. Jensen alphas are higher when estimated with the conditional model and the number of significant timing coefficients is greatly reduced.     

Bond pricing with a surface of zero coupon yields

We present a new method for consistent cross‐sectional pricing of all traded bonds in the fixed income market. By applying thin plate regression splines ( Wood, 2003 ) to bootstrapped zero coupon bond yields ( Hagan and West, 2006 ), the method decomposes traded yields into a risk‐free component plus premia for credit and liquidity risks, where the decomposition is consistent with the market valuations and underlying cash flows of the bonds. We apply the framework to end of quarter yield data from 2008 to 2011 on Australian dollar denominated semi‐government, supranational and agency (SSA) bonds, and find that the surface provides an excellent fit to the underlying zero coupon yield curves. Further, the decomposition of selected yield time series and cross‐sections demonstrates how credit premia increased for Australian SSA bonds through the Global Financial Crisis (GFC), but were counterbalanced by liquidity discounts as investors sought safe haven securities.     

Accounting Reform in Australia: Contrasting Cases of Agenda Building

On 4 March 1997, the Department of Treasury of the Australian Government announced sweeping measures to reform standard setting arrangements in Australia ( CLERP Paper No.1 , Commonwealth of Australia, 1997 ). The Government's agenda is profoundly reformist as it recommended the wholesale adoption of International Accounting Standards by Australian reporting entities, as well as advocating the introduction of market (selling) price accounting both nationally and internationally. While the notion of market value accounting is not new, this recommendation appears to be a historical first from a government, regulatory or standard setting body. Against this background, our study draws on a framework of 'political agenda building' proposed by Cobb and Elder (1972 ) and Cobb et al . (1976 ), in order to compare and contrast the competing standard setting reform agendas adopted by the Australian accounting profession and the Government. Using the Cobb and Elder framework, we discuss potential reasons why the CLERP agenda has supplanted that of the Australian accounting profession as well as some implications of these developments for the future of standards harmonization.