Long-Term Price Reaction to Dividend Reduction in an Imputation Environment – Evidence from Australia

Abstract

This article empirically investigates the information content and signalling power of decreases and omissions of cash dividend payments in an imputation tax environment. Consistent with prior literature We find significantly negative long term abnormal returns subsequent to dividend reductions, with some support for less negative long term abnormal returns arising in the case of unfranked dividend reductions Overall, our study shows conclusively that dividend reductions in Australia constitute a strong signal regarding the future prospects of the firm and, as such, our results are at variance with the results obtained in the U.S. The tax system in Australia differs from that in the U.S. and we do find some evidence of differential tax effects across the franking status of dividends.

Keywords: Long-term price reaction, Australia, Dividend Reduction, decreases and omissions, Franked and unfranked, Interim and Final