Are Imputation Credits Capitalized Into Stock Returns?

Abstract

This paper develops an equilibrium model demonstrating that: firstly, imputation credits are negatively capitalized into stock returns; and secondly, the extent of capitalization is a function of domestic investors’ relative risk tolerance. Using Australian data, it shows that imputation credits lead to lower required returns on stocks, which is consistent with the model’s predictions. The negative capitalization of imputation credits is stronger for stocks with larger size, smaller return volatility and smaller idiosyncratic risk. Overall, the theoretical and empirical evidence suggests that imputation credit capitalization is determined by all investors and does not support the marginal investor hypothesis.