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We investigate whether imputation tax credits are capitalised into Australian stock prices by utilising discounted cash-flow valuation models and examining the relation between earnings yields and imputation credit yields. While imputation credits are valuable to many investors, the evidence that they are reflected in share prices is at best mixed and largely unconvincing. Our results reveal that imputation credits fail to lower realised returns casting doubts over whether imputation credits are priced from the perspective of longer-term buyand-hold investors. If so, such investors can expect to fully benefit from their imputation credits, and imputation effects may not impact on the cost of capital.

Highlights: We interview retirement plan executives and survey members to investigate default asset allocation design  Executives do not allow for the low risk appetite of passive members  Executives mistake inactivity based on trust for inactivity caused by disinterest  Heterogeneity, trust and low skill of passive members support smart defaults

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For more information or to download a free copy, visit cfa.is/review2018 The Research Foundation Review 2018 summarizes the offerings from the CFA Institute Research Foundation over the past year-books, literature reviews, workshop presentations, and other relevant material.