Tax minimisation and arbitrage in a comparative statics and general equilibrium setting

Tax minimisation and arbitrage are examined in two different scenarios: a comparative statics study of Australian structured buybacks; and a general equilibrium asset pricing model.The first paper investigates structured buybacks in Australia using an event study. Structured buybacks provide a combination of dividends with imputation tax credits attached and a return of capital. This creates substantial tax advantages, leading shareholders to tender their shares below the market price. Limits on the minimum allowable tender price can create profitable trading opportunities which suggest that arbitrageurs will push up prices on the buyback announcement date followed by a partial reversal when tax credits detach from the stock. The data supports this theory. An event study is conducted which shows positive abnormal returns on the buyback announcement date and negative abnormal returns later when imputation tax credits are lost due to the 45 day rule and capital gains benefits are lost on the ex-buyback date. The second paper extends the first by developing and testing a detailed comparative statics model of the market price impacts of structured buybacks on critical dates over the life of the buyback. The model is tested using data from January 1998 to February 2013. The model seeks to explain the magnitude of positive abnormal returns on the buyback announcement date and the negative abnormal returns on the date that franking credits and capital losses are no longer available. The model has some success in explaining announcement day returns. However, the model has no explanatory power for the magnitude of negative returns on the date that the tax benefits from the buyback offer are no longer available. Shifting to a broader perspective, the third paper builds on Brennan's (1970) general equilibrium asset pricing model with heterogeneous tax rates and assets. Brennan’s model is extended to provide a required return formula under both a classical or imputation tax system where direct personal ownership of assets is an alternative to corporate ownership. This model is used to explicitly answer questions of how investors should optimally structure their asset holdings: personally, in which case the asset pays personal income and personal capital gains; or through a corporation, which pays bond interest income, dividend income or capital gains through buybacks.