Dividend reductions and signaling in an imputation environment

Balachandran, Balasingham and Krishnamurti, Chandrasekhar and Theobald, Michael and Vidanapathirana, Berty (2009) Dividend reductions and signaling in an imputation environment. In: Asian Finance Association International Conference 2009, 30 Jun - 3 Jul 2009, Brisbane, Australia.

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In contrast to the double taxation system prevailing in the U.S., Australian firms operate within an imputation tax environment with respect to dividend payments. We argue that the dividend imputation tax system increases the signaling potential of dividend reductions and our empirical findings strongly support this view. We find that the size of the dividend reduction is related to the tax credit status of the dividend. Abnormal changes in profitability are negative in the year following dividend reductions and are negatively related to the dividend reduction; similar signaling effects are found in terms of price reactions. The significance levels for the relations between abnormal change in profitability and dividend reductions, and price reactions and dividend reductions are statistically significantly stronger for dividends with associated tax credits. Overall, our study conclusively demonstrates that dividend reductions in Australia have strong signaling power and, as such, our results are at variance with the results obtained in the U.S.

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Item Type: Conference or Workshop Item (Commonwealth Reporting Category E) (Paper)
Refereed: Yes
Item Status: Live Archive
Additional Information: No evidence of copyright restrictions. No evidence of formal publication.
Faculty / Department / School: Historic - Faculty of Business - School of Accounting, Economics and Finance
Date Deposited: 02 Aug 2010 07:28
Last Modified: 14 Jul 2014 23:00
Uncontrolled Keywords: price reaction; Australia; dividend reductions; signaling; franked dividends; unfranked dividends
Fields of Research : 15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150201 Finance
Socio-Economic Objective: B Economic Development > 90 Commercial Services and Tourism > 9001 Financial Services > 900199 Financial Services not elsewhere classified
B Economic Development > 90 Commercial Services and Tourism > 9001 Financial Services > 900101 Finance Services
URI: http://eprints.usq.edu.au/id/eprint/6801

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