Investment, the Corporate Tax Rate, and the Pricing of Franking Credits

Abstract

I apply a new single‐pass capital asset pricing model methodology for assessing systematic risk to all ASX stocks which indicates that securities which pay franking credits in Australia appear to face far less systematic risk than do stocks that never pay franking credits. But in this context, this apparent reduction in systematic risk can be interpreted as being due to franking credits that are close to being fully priced. An efficient equilibrium is reached in which the marginal investor in Australia pays little or no Australian corporate tax because, once she exhausts compulsory savings, she borrows offshore and converts debt to equity.