RDP 9211: Dividends and Taxation: A Preliminary Investigation 1. Introduction

From a macroeconomic perspective, dividend policy is important because of its effects on the financing behaviour of firms and because of its implications for corporate saving. The former is of particular significance to monetary authorities if a distinct change in the dividend policy of firms induces a shift in the financing preferences of firms. This has implications for the behaviour of credit and the transmission of monetary policy.

Recent changes to the tax system are likely to influence companies' dividend policies. These changes are the introduction of the capital gains tax in September 1985, the introduction of dividend imputation in July 1987 and the introduction of a 15 per cent tax on the earnings of superannuation funds in July 1988. Several recent papers have examined the impact that these changes have had on the dividend payout ratio (e.g., Nicol (1991)). In this paper we expand on this work by examining the payout behaviour over a longer time horizon and by estimating the impact of these tax changes on dividends.

We examine the behaviour of the dividend payout ratio over the period 1959/60 to 1990/91. We use three sources of data: aggregate data for private corporate trading enterprises, a sample of companies quoted on the Australian Stock Exchange, and earnings and dividend yield data from the Stock Exchange. To anticipate the results, we find that dividend payments are dependent on both cash flow and tax considerations. We estimate that the tax changes account for a rise in real dividends per share of about 20 per cent between 1985/86 and 1990/91.

The plan of the rest of the paper is as follows. Section 2 briefly discusses the theoretical determinants of dividend policy. Section 3 looks at some recent influences on the payout ratio in Australia. Section 4 examines the trends in the payout ratio. We present some empirical results on the determinants of dividend policy in Section 5, and Section 6 concludes the paper.