Acknowledgements: We thank David Gallagher and Tim Gapes for their useful comments. Copyright © 2015 All rights reserved. TABLE OF CONTENTS Section Page Executive Summary 3 Background 4 4 2.1 Historical Context 6 2.2 The Tax Discussion Paper (TDP) 8 2.3 Scope of Potential Changes to the Imputation System Theory Imputation, Prices and the Cost of Capital 8 – 9 3.1 Investor Taxes and Required Returns 12 3.2 Equilibrium When Tax Status Varies 15 3.3 What Tax Effects Are Taken Into Account? Security Pricing: Empirical Evidence 16 16 4.1 Various Methods, Mixed Results 19 4.2 Methodological Issues 20 4.3 Evidence on Whether Investors Take Tax Into Account 23 4.4 What If Imputation Was Removed? Cost of Capital and Project Evaluation in Practice 26 26 5.1 Evidence from the Corporate World 27 5.2 Regulatory Practice 27 5.3 What If Imputation Was Removed? Capital Structure 28 28 6.1 Theory 29 6.2 Evidence 31 6.3 What If Imputation Was Removed? Payout Policy 31 31 7.1 Theory 33 7.2 Evidence 34 7.3 What If Imputation Was Removed? Investor Portfolios 35 35 8.1 Clienteles 35 8.2 Portfolios 36 8.3 What If Imputation Was Removed? 37 Conclusion References 38
Acknowledgements: We thank David Gallagher and Tim Gapes for their useful comments. Copyright © 2015 All rights reserved. TABLE OF CONTENTS Section Page Executive Summary 3 Background 2.1 Historical Context 2.2 The Tax Discussion Paper (TDP) 2.3 Scope of Potential Changes to the Imputation System 4 4 6 8 Theory – Imputation, Prices and the Cost of Capital 3.1 Investor Taxes and Required Returns 3.2 Equilibrium When Tax Status Varies 3.3 What Tax Effects Are Taken Into Account? 8 9 12 15 Security Pricing: Empirical Evidence 4.1 Various Methods, Mixed Results 4.2 Methodological Issues 4.3 Evidence on Whether Investors Take Tax Into Account 4.4 What If Imputation Was Removed? 16 16 19 20 23 Cost of Capital and Project Evaluation in Practice 5.1 Evidence from the Corporate World 5.2 Regulatory Practice 5.3 What If Imputation Was Removed? 26 26 27 27 Capital Structure 6.1 Theory 6.2 Evidence 6.3 What If Imputation Was Removed? 28 28 29 31 Payout Policy 7.1 Theory 7.2 Evidence 7.3 What If Imputation Was Removed? 31 31 33 34 Investor Portfolios 8.1 Clienteles 8.2 Portfolios 8.3 What If Imputation Was Removed? 35 35 35 36 Conclusion 37 References 38
Centre_for_International_Finance_and_Regulation_Submission_3.docx