The Market Valuation of Cash Dividends: The Case of the CRA Bonus Issue*
H. Chu(Finance Discipline, Economics and Business, The University of Sydney, NSW, Australia)
G. Partington(Finance Discipline, Economics and Business, The University of Sydney, NSW, Australia)

In 1996, Australia’s CRA and UK’s RTZ merged to form the world’s largest mining company, but the companies remained separately listed on their domestic exchanges. In order to equalize the price of the two companies’ shares, before the dual listing, CRA made a bonus issue. Shares in the bonus issue were not entitled to the next CRA dividend, which carried imputation tax credits. The contemporaneous price differences between the old shares and the bonus shares are used to measure the market value of dividends and associated tax credits. Consistent with imputation tax credits adding value to the dividend, 1 dollar face value of dividends was observed to have a market value significantly greater that its face value. The market value of the dividend varied depending on the proximity of observations to the ex-dividend date. Close to the ex-dividend date, the premium of market value over face value was smaller. The results are consistent with dividend values set by short-term traders about the ex-dividend date and by long-term investors at other times.

*We acknowledge the assistance of the Australian Stock Exchange (ASX) and the Securities Industry Research Centre of Asia-Pacific (SIRCA) in providing data. We also acknowledge the support of the Capital Markets Cooperative Research Centre (CMCRC) and the University of Technology Sydney (UTS). We thank the ARC and PricewaterhouseCoopers for funding our research. We are grateful to Richard Stewart and Wayne Lonergan for stimulating discussions and Kim Trang for excellent research assistance. We are also indebted to William Huang for excellent programming assistance.

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Price and Volume Behavior around the Ex-dividend Day: Evidence on the Value of Dividends from American Depositary Receipts and their Underlying Australian Stocks*
AeLee Jun(School of Accounting and Finance, Faculty of Commerce, University of Wollongong, NSW, Australia)
V. T. Alaganar(Finance Discipline, School of Business, University of Sydney, NSW, Australia)
Graham Partington(Finance Discipline, School of Business, University of Sydney, NSW, Australia)
Max Stevenson(Finance Discipline, School of Business, University of Sydney, NSW, Australia)

Australian residents are tax-advantaged, relative to American investors, in their access to imputation tax credits on Australian stocks. This paper provides evidence consistent with a difference in dividend valuations between Australian stocks and their American Depositary Receipts (ADRs). The ex-dividend drop-off ratio is lower for ADRs relative to their underlying Australian stocks and this difference is most pronounced for stocks that have imputation tax credits and high dividend yields. Consistent with dividend capture trading in the Australian market, the difference in drop-off ratios is driven by both temporarily higher Australian cum-prices and temporarily lower Australian ex-prices. Abnormal trading volume about the ex-day is present in both markets and in the Australian market the abnormal volume is greater for dividends with imputation tax credits. Dividend-related trading leads to price differences across the markets on the ex-dividend day. Price differences are also observed when the stock and the ADR trade with different dividend entitlements due to different ex-dividend dates.

*We would like to thank the Capital Markets Co-operative Research Centre (CMCRC) for supporting this research, and the School of Finance and Economics, at the University of Technology Sydney (UTS) where one of the authors spent a period of sabbatical while completing this paper.

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Securitization and Rate Setting in the UK Mortgage Market*
Amelia Pais(Department of Commerce, Massey University, New Zealand)

The objective of this paper is to investigate the way mortgage rates are set by lenders funded by deposits versus lenders funded in the capital markets by securitization. The paper tests the response of both types of lenders to changes in market rates using an Error Correction Model. The results obtained here show that the rates of lenders opting for securitization adjust slightly faster to changes in market rates, lowering borrower costs at times of falling interest rates; the difference in mark-up over the market rate is also lower on average for these lenders although it is not statistically significant. On the contrary, depository institutions seem to engage in more interest rate smoothing, confirming one of the distinctive characteristics of traditional bank lending, the provision of risk-sharing opportunities to borrowers.

*The author wishes to thank Professor Heffernan, Professor Bruce Grundy and an anonymous referee for their useful comments

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Institutional Trading and Price Momentum
Chih-Hsien Jerry Yu(University of Baltimore, MD, USA)

This paper aims to explore the effect of institutional trading on the two asymmetric phenomena found by Lee and Swaminathan: (1) asymmetric price momentum: price momentum is more pronounced among high-turnover stocks; (2) asymmetric return phenomenon: low-turnover stocks tend to outperform high-turnover stocks. Lee and Swaminathan use a ‘momentum life cycle’ to explain the asymmetric momentum effect while attributing the asymmetric return phenomenon to the analysts’ overestimating (underestimating) the future profitability of high (low)-turnover firms. However, it essentially needs trading activity to induce both of the above asymmetric results. Because institutional investors exhibit a momentum trading pattern and the trading behavior of institutional investors may have a huge impact on the movement of stock prices, institutional trading may be one of the major driving forces leading to both of the above asymmetric patterns. The empirical results show that, first of all, after controlling for the turnover, the price momentum is still more pronounced among stocks with higher institutional ownership, while high-turnover stocks no longer exhibit a pronounced momentum effect after controlling for the institutional ownership. Furthermore, stocks with higher institutional ownership have better return performance in any of the turnover groups. While low-turnover stocks still outperform high-turnover stocks after controlling for the institutional ownership level, for some winner stocks this is no longer true. The results suggest that the asymmetric momentum effect is not induced by a stock’s turnover, but rather it is driven by institutional trading. Turnover is only a proxy for institutional trading. That is, turnover per se has no economic significance in such a momentum phenomenon.

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