Variance decomposition of stock returns and dividend imputation system

The relative contribution to stock price volatility of news in expected future dividends and in expected future returns in Australia is studied. The effect of the dividend imputation tax system on such contribution is investigated. It is found that news in expected future returns contributes more to price volatility in recent observations. Compared to an economy under the classical tax system such as the US, the correlation between the news about dividends and the news about returns is substantially negatively higher under the imputation system. This may be explained by a stronger financial signalling effect of franked dividend news under such a system.