Dividend-tax avoidance trade and its impact on the stock market

Abstract

This study uncovers a unique dividend-tax avoidance trade that allows high-bracket investors to circumvent taxation on dividend income. As the first comprehensive analysis, we examine diverse investor types, implementation techniques, and the implications for stock prices. Utilizing unique account-level trading data from the Taiwan Stock Exchange, we present empirical evidence highlighting the activities of traders in both the stock and warrant markets. These traders simultaneously sell stocks, buy call warrants before the ex-dividend day, and close their positions afterward. Our findings reveal that this behavior frequently occurs in stocks with issued warrants and low imputation tax-credit ratios. Additionally, we observe substantial disparities in trading behaviors among diverse investor types, including foreign institutions, investment trusts, dealers, domestic institutions, and retail investors. The empirical results indicate that dividend-tax-avoidance trades negatively affect stock prices before dividend payments.