The Dividend Substitution Hypothesis: Australian Evidence
In a perfect capital market firms are indifferent to either dividends or repurchases as payout mechanisms, suggesting that the two payout methods should be perfect substitutes. Empirical research at the single country level, as well as cross country studies, provide evidence that dividends and repur...
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Published in | Abacus (Sydney) Vol. 51; no. 1; pp. 37 - 62 |
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Main Authors | , , |
Format | Journal Article |
Language | English |
Published |
Sydney
Blackwell Publishing Ltd
01.03.2015
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Subjects | |
Online Access | Get full text |
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Summary: | In a perfect capital market firms are indifferent to either dividends or repurchases as payout mechanisms, suggesting that the two payout methods should be perfect substitutes. Empirical research at the single country level, as well as cross country studies, provide evidence that dividends and repurchases act as substitutes (the dividend substitution hypothesis), and that the tax treatment of dividends versus capital gains affects this relation. Australia, which operates under a full dividend imputation system, has two types of repurchases: on‐ and off‐market. On‐market repurchases are taxed as capital gains while off‐market repurchases comprise a large dividend component carrying valuable tax credits. Australia thus provides a natural setting to investigate how the tax treatment of proceeds affects the dividend substitution hypothesis. Dividend substitution is found to exist for on‐market repurchases but not for off‐market repurchases, thus providing further support for the idea that the tax treatment of proceeds affects the substitutability of repurchases and dividends. |
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Bibliography: | Australian Research Council's Discovery Project - No. DP0878537 istex:4CBDC3D00E2A5DB925F53AA2E07D951C1F3B4F37 ark:/67375/WNG-K3644V17-J ArticleID:ABAC12041 ObjectType-Article-1 SourceType-Scholarly Journals-1 ObjectType-Feature-2 content type line 23 |
ISSN: | 0001-3072 1467-6281 |
DOI: | 10.1111/abac.12041 |