Risk premia and the ex-dividend stock price behavior: Empirical evidence

Abstract

It has been suggested that the positive abnormal return on ex-dividend days may be due, in part, to the existence of a risk premium. The evidence is consistent with the hypothesis that on ex-dividend days trading in low dividend yield stocks is dominated by ordinary investors who demand a tax premium for their higher tax liability on ordinary dividends relative to capital gains. Trading in high dividend yield stocks appears to be dominated by short-term traders who obtain a positive unsystematic risk premium. Finally, the structural relationship between rates of return, on the one side, and dividend yield and risk premia, on the other, is quite different on ex-dividend and other days as well as through time.