Abstract
We examine the impact of the 2003 dividend tax cut, which removes the differential taxation between dividends and capital gains for individual investors, on the ex-dividend day price and trading volume. We find the ex-dividend day price and volume are affected by taxes, risk, and transaction costs. The ex-dividend day price drop ratio (excess return) increases (decreases) and dividend clienteles weaken after the tax cut. Ex-dividend day abnormal volume among high dividend yield stocks decreases after the tax cut consistent with a diminished motivation for tax-induced trading. Our results suggest that individual investors have a measurable effect on the ex-dividend day price and trading volume.
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