The Impact of Dividend Imputation on Share Prices, the Cost of Capital and Corporate Behaviour

Debate continues about how dividend imputation affects equity markets. Central issues are whether franking credits are 'priced' by the market, and how imputation influences the behaviours of market participants. We argue that the presence of imputation affects investor and corporate behaviour, and that it would be dangerous to assume imputation has no effect on prices because they are entirely determined in global markets. Focusing on the impact on corporate behaviour, especially with regard to dividend payout and capital structure policies, we conclude that imputation matters and it has probably been beneficial.