Market Microstructure and Ex-Dividend Day Pricing Anomaly: Evidence from a Unique Environment

Abstract

This paper examines the effect of the reduction in tick size on ex-dividend day stock price behavior taking advantage of a unique data where there are no taxes on dividends and capital gains and the tick size is fixed for all traded securities. These data allow us to differentiate among competing ex-dividend day hypothesis in the absence of confounding tax effects present in other markets. We find that ex-day premiums increase and abnormal returns decrease as the tick size become smaller, which is in line with the market microstructure hypothesis. On the other hand, we do not find any significant increase in abnormal volume with the reduction in tick size. This finding is inconsistent with the pattern that should occur if transaction cost is the dominant factor causing the ex-day phenomenon.