Taxes,International Clienteles and the Value of ADR Dividends

An alternative approach to valuing dividends is developed and applied to American Depositary Receipts (ADRs) on Australian stocks. The values of ADR dividends are estimated from the period when, due to different ex‐dividend dates, the ADRs and their underlying stocks trade with differential dividend entitlements. Australian ADR dividends are valued at less than their face value and the dividends on the underlying stocks are valued at more than their face value. This suggests that ADR dividends are priced by a clientele of US investors placing little value on the imputation tax credits attached to the dividends and that a clientele of Australian resident investors, who obtain value from imputation tax credits, price the dividends on the underlying stock.     

DIVIDEND POLICY AND ITS RELATIONSHIP TO INVESTMENT AND FINANCING POLICIES: EMPIRICAL EVIDENCE

In this paper it is argued that dividend policy is not determined as a residual, but rather that firms adopt independent dividend and investment policies. Empirical evidence, based on a questionnaire survey, supports this view. Independent dividend and investment policies are possible because debt finance is usually raised in sufficient quantities to accommodate the financial demands created by dividend and investment decisions.     

Run length and the predictability of stock price reversals

Survival analysis is used to estimate time‐varying probabilities of price reversals using daily data for the Australian All Ordinaries Price Index. Lagged price changes lead to persistence (shortening) in a price run if they are of the same (opposite) sign as the run. An increase in the number of runs observed in the previous 30 days also increases the probability of price reversal. The predictive accuracy of the models is assessed using a probability scoring rule. Consistent with market efficiency, the estimated models are less accurate than the random walk model in predicting the length of individual price runs out‐of‐sample.     

Rating Migrations: The Effect of History and Time

We examine the effect of rating history and the passage of time on the rating migration hazard for corporate debt issuers. Controlling for industry effects and the evolution of business and political cycles, the results consistently show that the next change of rating depends more strongly on rating history than it does on the current rating. However, there are significant interactions between the main effects of rating history and the duration of the current rating. The result is substantial decay in the effects of rating history the longer a rating remains unchanged. This decay effect is stronger for downgrades and for ratings in the speculative category.     

The value of dividends: Evidence from cum-dividend trading in the ex-dividend period

What is the market value of a dollar of fully franked dividends? We address this question by exploiting a new phenomenon in the Australian capital market—the trading of shares cum-dividend during the ex-dividend period. This allows a relatively clean measurement of the combined value of dividends and the associated tax effects net of transactions costs. Consistent with the theoretical model that we develop, the evidence from this sample is that one dollar of fully franked dividends, after tax effects and transaction costs, is worth significantly more than one dollar. We also show that, in contrast to our measure, the traditional measure of the ex-dividend price drop-off, based on close to close prices, has a lower average value and exhibits substantially more cross sectional variation.     

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.     

DIVIDEND POLICY AND TARGET PAYOUT RATIOS

This paper is concerned with a study of the dividend policies of large Australian companies. A majority of the firms studied used an explicit target payout ratio, reflecting an objective of distributing a more or less fixed proportion of profits in the long run. However, a significant minority (41%) reported that they made no explicit use of payout targets. Some firms had changed their targets materially over the period 1965–1980, and there was weak evidence that these firms tended to have lower targets than firms which left their targets relatively unchanged. There was no evidence of an industry effect upon the use, or magnitude, of payout targets.     

CLARIFYING FUNDS STATEMENTS — THE TWO ENTITY TEST

A major shortcoming of the funds statement prepared under a resources concept is that the meaning of the term “resources” is unclear. A transaction test is usually adopted to identify entries involving funds, but it is apparent from published reports and from the Australian profession's recent exposure draft that substantial confusion remains. One response has been to reject the broader concepts in favour of narrower definitions such as cash or working capital. In this article, however, it is argued that an all resources funds statement, properly defined, has an important contribution to make. A “two entity” test is proposed which is claimed to be tighter and closer to the spirit of the original resources concept than the present transaction test.     

Capital gains tax,managed funds and the value of dividends: The case of New Zealand

The taxation of capital gains for Managed Investment Funds in New Zealand was abolished in October 2007, putting these entities on a similar footing to private investors. Prior to this change most private investors were not taxed on capital gains from investments in New Zealand companies, whereas Managed Funds were taxed on these gains. New Zealand company dividends carry imputation tax credits and thus had a tax advantage for Managed Funds before October 2007. After the change the value of dividends relative to capital gains declined substantially for Managed Funds. The evidence is that the market value of the dividends, particularly for high dividends, also declined substantially subsequent to the tax change.     

The Motivation for Takeovers in the UK

Abstract:  The motives for takeovers in the UK are investigated by examining the correlations between wealth gains for the target and both acquirer wealth gains and total wealth gains. The results are sensitive to whether the gains are measured over a long or short window, the method of measuring abnormal returns, and whether controls are included for the form of the bid consideration and the sign of total bid gains. There is evidence of bids motivated by synergy, but there is also evidence of the presence of hubris and weak evidence of bids with an agency motivation. Once controls for bid consideration and the sign of total gains are introduced the explanatory power of the models increases substantially and diversity of results about bid motivation also increases.