Dividend Imputation in Australia – Part 3

This third part of dividend imputation in Australia discusses a previous study on the issue. Remarkably, this part reviews a paper by Feuerherdt, et al. (2010). In their paper, Feuerherdt, et al. (2010) investigate the value of franking credit attached to dividends from hybrid securities. They do so by comparing the price before and after the ex-dividend date. They test the issue on hybrid securities for at least two reasons. First, the signal-to-noise ratio of hybrid securities is higher than ordinary shares. In that case, the price changes of hybrid securities are more likely to be attributed to dividend payments. Hence, the study can exclusively examine the influence of dividends on the drop-off ratio around the ex-dividend date. Second, hybrid securities are exclusively marketed to domestic investors. As they are more likely to be able to utilize the franking credit, then there is a higher probability that the investors value franking credit on hybrid securities.

To test the issue, Feuerherdt, et al. (2010) employ a sample of Australian listed companies in 1995 – 2002. They find that the drop-off ratio is close to one for reset preference shares and insignificantly different from one for convertible preference shares. It may show that franking credit has no effect on the share price. Moreover, they find that there is no significant difference in the drop-off ratio between hybrid securities and OS. This may indicate that domestic and foreign investors value the franking credit similarly. It happens because domestic investors dominate hybrid securities, while foreign investors dominate ordinary shares in Australia.


  • Feuerherdt, C., Gray, S., & Hall, J. (2007). The Value of Imputation Tax Credits on Australian Hybrid Securities. Political Economy: Taxation.

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Arfian Erma Zudana, S.E., M.Bus. (Acc), Ph.D., Cert.DA.