Degree Name

Doctor of Philosophy


School of Accounting, Economics and Finance


Exactly how franking credits influence the Australian equity market has sparked controversy among academics, regulators, politicians and practitioners since the introduction of the dividend imputation system in July 1987. Australia applied a classical tax system where corporate earnings are taxed twice, once at the corporate level and the second at the personal level on distributed dividends before July 1987. After the introduction of the imputation system to remove the double taxation, Australian resident shareholders who receive fully franked dividends are able to obtain a credit for the corporate tax that has already been paid. The discussion in the Australian Government (2014, 2015) triggers controversy among academics and practitioners on whether the imputation system should be modified or even completely revoked. The main topic of the debate is “whether franking credits are priced in the market”. Despite much theoretical and empirical research, the evidence is mixed, and there is little consensus. This thesis enhances our understanding of the pricing of franking credits by providing evidence in the comparative pricing studies, the ex-dividend day studies, and the franking credit balances studies. The first research chapter provides direct evidence that differences in the tax systems between Australia and the UK, especially dividend imputation tax credits, are a statistically-significant factor in explaining this premium between the Dual-Listed Company (DLC) twins of BHP and Billiton. This chapter extends the comparative pricing studies literature by proposing a method to compare the American Depositary Receipts (ADRs) prices of DLC twins in the comparative pricing studies of franking credits. The second research chapter explores the implications of the ex-dividend period irrational exuberance by proposing the explanation that individual investors irrationally overvalue dividends and franking credits due to behavioural finance reasons. This chapter contributes to the existing ex-dividend date studies literature by examining the impact of dividends and franking credits surrounding the ex-dividend date using a longer horizon. The third research theme further investigates the market valuation and determinants of franking credit balances to fill in the gap in franking credit balances studies, which has been scarce to date. Each of these studies shows that franking credits are valuable in the hands of resident shareholders and that they are reflected in the market capitalization of firms. Finally, our results provide direct evidence on the debate of whether the imputation system should be abandoned in Australia. Our findings suggest that the imputation system should not be removed without a change in other tax rules (e.g., personal tax rate). Share prices in Australia are predicted to drop sharply if Australia abandoned the imputation system while retaining the same personal income tax system regime.



Unless otherwise indicated, the views expressed in this thesis are those of the author and do not necessarily represent the views of the University of Wollongong.