Ex-Day Stock Price Behavior in an Emerging Market

Abstract

This study investigates the ex-dividend day stock prices of the firms listed on the Dhaka Stock Exchange (DSE) where the tax rate is higher on dividends than on capital gains. The results help to explain what impact taxes have on the ex-day stock prices behavior in an emerging market. To examine the tax effect on the ex-day stock prices behavior, this study considers after-tax dividends and computes the raw price ratio, market adjusted price ratio, raw price drop, market-adjusted price drop. The market-adjusted ex-dividend day abnormal returns and relative trading volume are also examined to determine the direction of investor trading around the ex-day. The main hypotheses examine whether the mean (median) differs from its theoretical value by using a t-test and nonparametric sign-rank test. The findings suggest that the drop of stock prices on the ex-day on the DSE is not due to taxes or transaction costs but to valuation assumptions made by investors in determining the equilibrium stock price.