Corporate governance in Australia: Share repurchases under an imputation tax system

Abstract

Research Question: Whether the mitigating effect of corporate governance on investor perceptions of corporate agency problems affects corporate financial dividend decisions is a question, especially under an imputation tax system. Motivation: Since 2003 Australian firms must comply with the Principle of Good Corporate Governance and Best Practice Recommendations by the Australian Securities Exchange. Moreover, since the imputation tax system in Australia substantially differs from other countries, a study investigating the effect of corporate governance on share repurchases in Australia is warranted. Idea: Hence, this paper examines the association between corporate governance and share repurchases in Australia given its unique taxation system for corporate dividend payments. More specifically, we examine the association between corporate governance and the choice of dividend strategies under Australia’s imputation tax regime. We developed and tested three hypotheses: 1) better corporate governance is associated with greater ratio of share repurchase; 2) the ratio of share repurchase is positively associated with the payout ratio of cash dividends for firms that adopt a franked dividend regime; and 3) any positive association between the ratio of share repurchase with the payout ratio of cash dividends for firms that adopt a franked-dividend regime is evident only for firms with strong corporate governance. Data: We have a final sample of 1858 firm-year observations of which 250 (i.e., 13.5%) involve share repurchases for the 2004-2013 period. The sample companies are obtained from the constituents of the ASX 300, which contains the top 300 firms listed on the stock exchange in Australia (ASX). Method/Tools: We use Tobit regression method to estimate the models. Findings: Consistent with the literature, we find a positive association of share repurchases with better corporate governance, but contrary to the literature for the U.S. and Sweden, we find a positive association between share repurchases and cash distributions, which weakens with poorer corporate governance. Contributions: Our robust findings highlight the importance of country-specific institutional arrangements such as tax regimes when understanding corporate dividend strategies. Overall, we show that the mitigating effect of corporate governance on investor perceptions of corporate agency problems affects corporate financial dividend decisions.