The market value of imputation tax credits in the New Zealand sharemarket: an empirical analysis

Abstract

This thesis examines ex-dividend day share price behaviour to determine empirically the estimated value of imputation tax credits in the New Zealand sharemarket. The use of ex-dividend day share price behaviour is due to the underlying premise of the tax-effect hypothesis that share price behaviour on ex-dividend day reflects marginal investors' after-tax value of receiving dividends as opposed to capital gains. Hence a dividend drop-off ratio model is used to determine whether investors have recognised and are receiving the value of imputation tax credits. Some results are inconsistent with the tax-effect hypothesis. However, it is estimated that shareholders do, on average, value tax credits at approximately 60 percent of face value. The value of tax credits should be taken into account when firms are making decisions on investment, capital structure and dividend policy. Establishing the market value of imputation tax credits enables this value to be incorporated into a firm's decision-making process.