Imputation Credits and Trading Around Ex-Dividend Day: New Evidence in Australia

Abstract

This study examines the ex-day trading behaviour using daily ownership records aggregated by investor class under the novel environment of Australia. Domestic shareholders who have a strong preference for imputation credits capture franking credits by buying fully-franked stocks cum-dividend and selling them ex-dividend; the opposite is true for foreign shareholders. Dividend yield is the determinant factor of the choice of stock for the transfer of franking credits whereas risks and transaction costs are less relevant. We do not attribute our results to ex-day trading, arguing that, due to the 45-day holding period requirement, ownership transfer should take place at a longer horizon. Furthermore, domestic institutions act as liquidity providers to foreign investors and domestic individuals, who tend to initiate trading before the stock goes ex-dividend.