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The Market Valuation of Cash Dividends: The Case of the CRA Bonus Issue *
Author(s) -
CHU H.,
PARTINGTON G.
Publication year - 2008
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/j.1468-2443.2008.00072.x
Subject(s) - dividend , dividend policy , valuation (finance) , market value , financial economics , economics , dividend yield , dividend tax , business , monetary economics , finance , tax reform , gross income , public economics , state income tax
In 1996, Australia's CRA and UK's RTZ merged to form the world's largest mining company, but the companies remained separately listed on their domestic exchanges. In order to equalize the price of the two companies' shares, before the dual listing, CRA made a bonus issue. Shares in the bonus issue were not entitled to the next CRA dividend, which carried imputation tax credits. The contemporaneous price differences between the old shares and the bonus shares are used to measure the market value of dividends and associated tax credits. Consistent with imputation tax credits adding value to the dividend, 1 dollar face value of dividends was observed to have a market value significantly greater that its face value. The market value of the dividend varied depending on the proximity of observations to the ex‐dividend date. Close to the ex‐dividend date, the premium of market value over face value was smaller. The results are consistent with dividend values set by short‐term traders about the ex‐dividend date and by long‐term investors at other times.