An Impact of Investor Tax Heterogeneity on Ex-Dividend Trading: Evidence from Australia

Abstract

This paper provides an investigation of the trading volume around the ex-dividend day and its determinations in an Australian context. This is achieved by examining ex-dividend events of a sample of S&P/ASX 300 stocks during the period from 2008 to 2012. The principal aim of the paper is to examine the impact of investors’ tax heterogeneity on ex-dividend day abnormal trading volume. Our results show that investors’ tax heterogeneity increases abnormal trading volume around the ex-dividend day, consistently with the expectation of the dynamic tax-induced hypothesis. Our results are consistent with different measures of tax heterogeneity. Further, we find that franking credit has a significant role in widening the tax heterogeneity among investors and thus motivating trading around the ex-day.