Relationship between franking credits and the market risk premium: A reply

Gray, Stephen and Hall, Jason (2008) Relationship between franking credits and the market risk premium: A reply. Accounting and Finance, 48 1: 133-142. doi:10.1111/j.1467-629x.2007.00243.x


Author Gray, Stephen
Hall, Jason
Title Relationship between franking credits and the market risk premium: A reply
Journal name Accounting and Finance   Check publisher's open access policy
ISSN 0810-5391
1467-629X
0110-5159
Publication date 2008-03
Year available 2008
Sub-type Article (original research)
DOI 10.1111/j.1467-629x.2007.00243.x
Open Access Status
Volume 48
Issue 1
Start page 133
End page 142
Total pages 10
Editor R. Faff
Place of publication Melbourne, Vic
Publisher Wiley-Blackwell Publishing Asia
Collection year 2009
Language eng
Subject 710401 Finance and investment services
350301 Finance
150201 Finance
900101 Finance Services
900102 Investment Services (excl. Superannuation)
Abstract We have previously documented an inconsistency between the dividend yield implied by the Officer (1994) model with standard Australian regulatory parameters and actual dividend yields of Australian companies. We have shown that, within the Officer framework, this inconsistency can be resolved by setting the assumed value of franking credits (γ) to zero, consistent with the practice of Australian firms and independent valuation experts. Truong and Partington (2008) and Lally (2008) recognize this same inconsistency and propose alternate ways of resolving it. In this paper, we demonstrate that these proposals are outside the Officer framework. The standard set of regulatory parameters cannot be resolved with observed dividend yields within the Officer framework. Whichever method is used to resolve the inconsistency, the effect will be an increase in the estimated after-tax cost of equity.
Keyword Franking Credits
Cost of Capital
Dividend Yields
Market Risk Premium
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: 2009 Higher Education Research Data Collection
UQ Business School Publications
 
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Created: Tue, 25 Mar 2008, 14:21:19 EST by Karen Morgan on behalf of UQ Business School