An empirical analysis of the market value of imputation tax credits in the New Zealand share market

Abstract

This study argues that the value of imputation tax credits should be taken into account when firms are making decisions on investment, capital structure and dividend policy. The research examines ex-dividend day share price behaviour to determine empirically the estimated value of imputation tax credits in the New Zealand sharemarket, and tests the ‘tax-effect hypothesis’ that share price behaviour on ex-dividend day reflects marginal investors’ after tax value valuation of income received as dividends as opposed to capital gains. Hence a dividend drop off ratio model is used to determine whether or not investors have recognised and are receiving the value of imputation tax credits. It was estimated that shareholders do, on average, value tax credits at just under 60% of their face value.