Are Ex-day Dividend Clientele Effects Dead? Dividend Yield verses Dividend Size

Abstract

We document new evidence that the ex-dividend day stock price behavior in the U.S. is inconsistent with the tax explanation in several aspects. We find that within a tick multiple, as dividend size increases, dividend yields increase, but the price-drop-to-dividend ratios decrease. For dividends that are less than a tick, there is no relation between price-drop-to-dividend ratio and dividend yield, and for dividends that are less than half a tick, the average price drop is larger than dividend amount. These facts contradict the tax explanation of the ex-dividend day phenomenon. But these patterns are qualitatively consistent with Dubofsky's argument that the exchange rules on how to adjust the prices in the existing limit orders affect ex-day price drop behavior. The positive relation between the price-drop-to-dividend ratio and dividend yield is more pronounced as dividend size increases. We point out this is also qualitatively consistent with Dubofsky.