I conclude by calling for more research to evaluate the extent to which other nonfinancial factors affect the decision to pay scrip dividends and the reasons why corporate investors fail to prevent companies from offering this option.
Under the classical system of corporation tax, the taxation of dividends at the firm and shareholder levels is not linked, and scrip dividends, like stock dividends in the US, are a cosmetic financial manipulation with no effect on the firm and its shareholders (e.
3) The institutional legislation underlying the imputation system implies that scrip dividends are likely to be favored by firms with potentially irrecoverable ACT, i.
Under the current UK tax system,(4) the tax credit on scrip dividends cannot be claimed by corporate investors or by individuals who have reliefs and allowances in excess of their income tax.
In contrast, domestic tax-paying individual investors are able to claim the tax credit on scrip dividends.
In sum, the UK imputation system encourages firms to pay scrip dividends.
Retaining cash by using scrip dividends avoids increased monitoring and may convey less negative information to the market.
Scrip dividends can also provide issuing firms with several other benefits.
In this case, managers are likely to issue scrip dividends and to encourage all shareholders to opt for scrip rather than cash dividends.
The market reaction to scrip dividends depends on investors' perception of the costs and benefits of this option.
Scrip dividends that are offered in the United Kingdom during the six-year period from 1987 to 1992 comprise the sample.