Determinants of a Firm's Decision to Adopt a Dividend Reinvestment Plan: Australian Evidence

Abstract

A Dividend Reinvestment Plan (DRP) allows firms to increase their dividend payout and, at the same time, enables managers to retain cash in the firm for new investment opportunities. We examine the determinants of a firm's decision to adopt a DRP under the Australian dividend imputation regime over the sample period 1995-2009. Dividend imputation substantially reduces any tax advantage to debt and encourages firms to distribute franked dividends to Australian tax-resident shareholders. Reforms to Australia's tax system in July 2000 also allowed Australian individual, superannuation and pension fund investors to claim back from the Australian Tax Office the value of any surplus franking credits distributed to shareholders. Overall, we find evidence to support the role of taxation of equity income in the determination of a firm's dividend policy. Firms adopting a DRP had a higher dividend payout ratio compared to non-DRP firms and were also more likely to adopt a DRP subsequent to the July 2000 tax reforms. There was also some evidence that DRP firms paid dividends with higher levels of franking credits, particularly in the post-tax 2000 reform period.