Compared to the control sample, firms that issue scrip dividends do not report a higher proportion of irrecoverable ACT in their accounts, nor do they have a higher proportion of their earnings generated abroad on which the ACT cannot be claimed.
Why then do companies issue scrip dividends? The overall results suggest that firms in the UK do not appear to be making the optimal financial choice for the dividend payment vehicle, and that the scrip-dividend option is used to exacerbate the agency costs associated with the free-cash-flow problem.
Therefore, issuing firms can conserve the cash that would otherwise have been paid out as ACT and bypass the problem of unrelieved ACT, and do so without reducing their dividend payout.(3) The institutional legislation underlying the imputation system implies that scrip dividends are likely to be favored by firms with potentially irrecoverable ACT, i.e., by those with low taxable profits and high accumulated recoverable ACT, and by those that generate a high proportion of their earnings from overseas.
In contrast, domestic tax-paying individual investors are able to claim the tax credit on scrip dividends. For income-tax purposes, they are placed in the same position as individuals who have received cash dividends and reinvested the after-tax proceeds in the company.
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.
In addition to the test sample, I construct a control sample by matching every company that paid scrip dividends with a similar company that paid only cash dividends.
Total and BP have remained more cautious, but Total has promised to cancel the scrip dividend
discount, which will make scrips less attractive to shareholders and BP has resumed its share buyback programme, although volumes are likely to be minimal in the next two years under our base case scenario.