• Imputation credits are only beneficial to shareholders once they have been
distributed and typically this is achieved by paying cash dividends.
• Companies who retain a large proportion of after-tax earnings for reinvestment
(e.g. growth companies) will accumulate imputation credits.
• Shareholders can still realise the tax benefits from accumulated tax credits if the
company declares a taxable bonus issue.
• However, a change in the highest marginal tax rate to 39% may eliminate
taxable bonus issues as a key tool for delivering valuable imputation credits to shareholders.
CHAPTER THREE
ESSAV Two
The second essay on shareholder wealth effects of stock dividend ex-dates is provided in this chapter. An overview of the stock dividend ex-date literature is provided along with a discussion of the cash dividend ex-date literature under an imputation tax environment. An event study is conducted to examine the stock dividend ex-date effect in New Zealand between 1 983 and 2000. Regression analysis is also conducted to examine the relationship between stock dividend size and ex-date returns. This paper is reproduced in its final accepted form for a forthcoming publication in the Journal of Business Finance and Accounting as outlined in Chapter One Section 5.0. The essay's reference list is reproduced in the last section of this thesis.
ODD-LOT COSTS AND TAXATION INFLUENCES ON STOCK DIVIDEND EX-DATES
Abstract
Past research has revealed significant abnonnal ex-date returns for stock dividends even though the ex-date is known in advance and the distribution contains no new
infonnation. Various researchers have suggested that the higher transaction cost of selling odd-lot share parcels compared to round-lot share parcels is a key driver in the abnonnal returns. However, no study to date has directly compared the ex-date price reaction of stock dividends distributed when odd-lot transaction costs were charged to those issued when odd-lot costs were not evident. As odd-lot trade costs were
eliminated from the New Zealand Stock Exchange on the 1 st October 1 99 1 , the New Zealand market provides a unique opportunity to directly test the role, if any, that odd lot transactions costs have in explaining stock dividend ex-date returns. We find that prior to October 1 991 stock dividend ex-dates exhibit significantly positive returns, however we do not find any significant ex-date return once the higher odd-lot
transaction costs were removed. The New Zealand market also enables us to examine an imputation tax based argument of the ex-date price reaction and we find evidence that imputation tax credits have a value greater than zero.
Keywords
Stock Dividends; Ex-Dates, Imputation Tax; Odd-lot Costs JEL Classification: G14, G35, G38
ODD-LOT COSTS AND TAXATION INFLUENCES ON STOCK DIVIDEND EX-DATES
1 .0 Introduction
A stock dividend ex-date is known well in advance and therefore should contain no new information. As such, one would not expect any significant shareholder wealth impact on stock dividend ex-dates. However, studies in the US find positive abnormal returns on the ex-date. For example, Grinblatt, Masulis and Titman ( 1 984), Woolridge ( 1 983) and Eades, Hess and Kim ( 1 984) examining the ex-dates of stock dividends fmd significant positive abnormal returns on the ex-date. In an attempt to reconcile these findings with the non-effect predicted by information theory, various researchers have suggested that odd-lot transaction costs explain the ex-date returns. Stock dividends may result in investors holding an odd-lot share parcel. The odd-lot transaction cost argument is based on the premise that investors trading behaviour around an ex-date may be influenced in order to avoid the higher execution costs when selling odd-lot share parcels compared to round-lot share parcels. Also, in the few studies investigating stock dividend ex-dates outside of the US, taxes are suggested as the key driver of the ex-dates returns. Therefore, the key explanations put forward to explain the positive ex date effects found in different countries are transaction costs and taxes.
To date no study has directly compared the ex-date return of stock dividends issued when odd-lot transaction costs were charged to those issued when no extra costs were incurred for selling odd-lot share parcels. New Zealand provides an opportunity to directly make this comparison as well as examining the tax impact on stock dividend 1
ex-date returns. We examine both non-taxable and taxable stock dividends between 1 983 and 2000. On the 1 SI October 1 99 1 the higher trading costs for sale of odd-lot
share parcels was discontinued on the New Zealand Stock Exchange (NZSE).
Therefore our sample period covers both a period when odd-lot transactions costs were evident and another when they were absent.
Using the market model methodology we find significant positive ex-date returns for stock dividends issued during the period of odd-lot transaction costs. We also find evidence that these returns are related to stock dividend size. No significant abnormal return is evident for issues after odd-lot trade charges were discontinued. This is
consistent with the odd-lot transaction cost argument. We also find significant negative returns on the ex-date for taxable stock dividends. Our findings support the view that imputation tax credits have a value greater than zero (Hathaway and Officer 1 992, 1 996, Bruckner, Dews and White 1 994) and extends the work of Anderson, Cahan and Rose (200 1 ).
The remainder of this paper is structured as follows. Section 2 examines the key stock dividend ex-date studies and the New Zealand market and tax environment is described in Section 3 . This enables us to develop testable hypotheses about the expected stock dividend ex-date effect in New Zealand. Section 4 outlines the data and process used to select the samples to test the different hypotheses. Section 5 details the research method, while the results and conclusions are presented in Sections 6 and 7 respectively.