Carbon Risk and Dividend Policy in an Imputation Tax Regime

Abstract

Australia ratified the Kyoto Protocol in December 2007, which mandates the country to reduce carbon emissions, thereby exogenously affecting firms in highest-emitting industries, or polluters. We examine the role of carbon risk in dividend policy and how this effect varies as between imputation (paying franked dividends) and classical (paying unfranked dividends) tax environments in the unique experimental setting in Australia. We find that the probability of paying dividend and dividend payout ratio are lower for polluters relative to non-polluters subsequent to the ratification. We further document that the post-Kyoto dividend reduction of polluters is driven by their relative increase in earnings uncertainty. However, the negative effect is weaker for firms that pay franked dividends than otherwise. The evidence suggests a causal influence of carbon risk on firm dividend policy, and highlights the significance of imputation tax environment on the impact of carbon risk on dividend policy