Market reaction to the introduction of a foreign investor tax credit regime in New Zealand

Abstract

This study examines the stock market reaction to the announcement of a new foreign investor dividend tax credit system in New Zealand. The new tax system provides foreign investors, who own less than a 10% stake in a New Zealand company, with supplementary dividends. These additional dividend payments substantially offset any liability for New Zealand non-resident withholding tax. The new tax regime effectively increased the amount of after-tax cash dividends received by foreign shareholders of New Zealand companies. The empirical results indicate that significant and positive abnormal returns were concentrated predominantly on companies with fully imputed high dividend yields and high corporate tax rates. The evidence is consistent with the hypothesis that tax policy affects stock market behavior.