Abstract
This paper investigates the effect of liquidity on the ex-dividend day price premium. It is well documented that prices drop less than the dividend amount on the ex-day; this market inefficiency is generally attributed to the tax-induced clientele effect and various structural frictions. We show that, even in a tax-free market where the usual microstructure impediments are absent, abnormal returns persist. Using a new measure of liquidity, we find that liquidity is economically and statistically significant in the determination of the ex-dividend day price anomaly, indicating that trading restrictions can partially explain the ex-dividend return puzzle.
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