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Beta and Return: Implications of Australia's Dividend Imputation Tax System
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Robert Faff, David Hillier and Justin Wood
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Abstract
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US studies have consistently reported that the relationship
between beta and return is less steeply sloped than that
implied by the simple CAPM. The introduction of a dividend
imputation tax system in Australia and other tax law
differences suggest the relationship between beta and
return may be more steeply sloped in this country.
Empirical evidence subsequent to the introduction of the
dividend imputation tax system in July 1987 supports this
hypothesis. Further, it is found that no such change
occurs in the US market over this time period, which
strengthens the conclusion that the finding is tax-driven.
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Keywords
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RISK AND RETURN; IMPUTATION EFFECTS; ASSET PRICING.
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Contact Details
Robert Faff
School of Economics and Finance
Royal Melbourne Institute of Technology
GPO Box 2476V
Melbourne VIC 3001
E-mail: robert.faff@rmit.edu.au
David Hillier
Department of Accounting and Finance
University of Strathclyde
Curran Building
100 Cathedral Street
Glasgow G4 0LN
Scotland
E-mail: d.j.hillier@strath.ac.uk
Justin Wood
Barclays Global Investors Australia Ltd
PO Box N43 Grosvenor Place
Sydney NSW 1220
E-mail: Justin_Wood@bglobal.com
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We would like to thank John Bowers, Frank Finn,
Garry Twite, two anonymous referees and
seminar participants at the University of Tasmania,
Monash University and University of Queensland and
the 1996 AGSM Research Camp for helpful discussions and
feedback on this topic. Also special thanks to Brad
Thilges and David Simmonds at the Centre for Research
in Finance in the AGSM for access to data and considerable
computing assistance. Part of this research was conducted
while the first author was visiting the Department of
Accounting and Finance at the University of Strathclyde.
All remaining errors are solely attributable to us.
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