Dividend imputation in Australia: franking credits, tax changes and payout policy Jeffrey J Coulton and Chao Kevin Li
By: Coulton, Jeffrey J
.
Contributor(s): Li, Chao Kevin.
Material type: 
ArticleSubject(s): CREDITO | IMPUESTOS | EMPRESAS | DIVIDENDOS | POLITICA FISCAL
In:
Australian Tax Forum: a journal of Taxation Policy, Law and Reform v. 40, n. 2, 2025, p. 193-224Summary: We investigate the value-relevance of a firm`s undistributed franking credits. Franking credits accrue when firms pay tax on their earnings in Australia. We find a positive association between franking credit balances and equity value. In addition, we document a positive association between franking credit balances and firm`s dividend payout ratios. In the lead up to the 2019 Australian federal election, there was a proposal to change the taxation treatment of franking credits received as a cash rebate. The association between franking credit balances and payout ratios increased in anticipation of the rule change, and a negative relation between short-window abnormal share returns and franking credit balances around the announcement of the proposed change in tax policy. Our evidence shows that the undistributed franking credit balance disclosed by firms in financial reports is valued by investors.
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We investigate the value-relevance of a firm`s undistributed franking credits. Franking credits accrue when firms pay tax on their earnings in Australia. We find a positive association between franking credit balances and equity value. In addition, we document a positive association between franking credit balances and firm`s dividend payout ratios. In the lead up to the 2019 Australian federal election, there was a proposal to change the taxation treatment of franking credits received as a cash rebate. The association between franking credit balances and payout ratios increased in anticipation of the rule change, and a negative relation between short-window abnormal share returns and franking credit balances around the announcement of the proposed change in tax policy. Our evidence shows that the undistributed franking credit balance disclosed by firms in financial reports is valued by investors.
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