1. Dividends, Reinvestment and Bonus Shares: The Shareholders’ Choice James Murray Michael Skully Monash University, Australia

2. Dividends Under Imputation  Shareholders receive credit for Australian company tax already paid  Surplus credits can be used to offset other tax liabilities  Creates strong tax incentive to pay dividends Company tax currently 30% Company tax currently 30% Superannuation (pension) funds taxed at 15% want franked dividends Superannuation (pension) funds taxed at 15% want franked dividends

3. Cash Franking (Tax) Credits Franking (Tax) Credits P profit P (1-t c ) cash P profit P (1-t c ) cash Pt c tax Pt c credits Pt c tax Pt c credits P (1-t c ) net profit P income P (1-t c ) net profit P income Pt p tax Pt p tax No Cash! P(1-t p ) net income No Cash! P(1-t p ) net income TAX Company Profits Shareholder Income Dividend Payments and Tax

4. New Shares New Shares Franking (Tax) Credits Franking (Tax) Credits P (1-t c ) net profit P (1-t p ) net income Cash to fund growth P (1-t c ) worth of new shares new shares TAX Company Profits Shareholder Income Dividends With Reinvestment

5. DRPs and BSPs  DRP  Shareholders given choice to exchange cash for shares  Taxed as if dividend paid then money invested  BSP  Shareholders given choice to exchange a dividend for a bonus issue  May be taxed as capital or income distribution

6. Bonus Share Plans Pre July 1998  Capital distribution when paid from share premium account  Called ‘tax free’ but really tax deferred  No income tax but capital gains when shares sold Post July 1998  Capital distribution when paid from share capital account  Must be an alternative to a franked dividend  Extra anti-streaming laws apply From July 1990: Anti Dividend Streaming Laws When BSP is connected to a franked dividend, company must remove franking credits from balance as if dividend paid

7. Possible Clienteles  Low income tax: Want franking credits Want franking credits Cash or DRP on franked dividendsCash or DRP on franked dividends BSP possible on unfranked dividendsBSP possible on unfranked dividends  No capital gains tax Depends on income tax and company tax Depends on income tax and company tax BSP on unfranked dividendsBSP on unfranked dividends BSP when tp > tc on fully franked dividendsBSP when tp > tc on fully franked dividends

8. The Model Participation Ratio = Dollar Value Of Dividends Reinvested Cash Dividend With No Reinvestment = Number Of Shares Issued x Issue Price Per Share Number Of Shares x Dividend Per Share Relative Participation = BSP Participation / Total DRP & BSP Participation βi = independent variables representing plan design features, financial and ownership factors

9. Results Dependent Variables MinMaxMedian Total Participation1.7%96.5%53.3% DRP Participation0.3%94.3%39.4% BSP Participation0.1%84.9% 7.5% Relative BSP Participation0.4%99.6%18.7%

10. Independent Variables  Discount Offered on New Shares  Franking  Number Shareholders  Top 20 Shareholders  Payout Ratio  PE Ratio  Market to Book  Debt to Equity  Market Return on Shares

11. Total Reinvestment Rates

12. DRP Reinvestment Rates

13. BSP Reinvestment Rates

14. Relative BSP Reinvestment

15. BSP Post Streaming (1990)

16. Relative BSP Post Streaming

17.  Thankyou