Abstract
We examine stock prices and the number of stocks traded around ex-dividend dates of German stocks with tax-free dividend. Tax-free dividends are temporarily tax-exempt, as they reduce the initial purchasing price of a stock. With our analysis of this particular group of German stocks, we can make clear predictions regarding ex-date prices and analyze the number of stocks traded around ex-dates, doing so without the systematic bias of cum-ex trades over time. For XETRA, our empirical results indicate that ex-date prices decline, on average, by the amount of the dividend. We do not find a significant relationship between a stock’s price-drop ratio and dividend yield. Further, the empirical analysis suggests that there is no significant correlation between an abnormal number of a stock being traded and its dividend yield. These results are most consistent with tax-motivated reasoning. However, our volume analysis reveals no consistency regarding the abnormal number of stocks traded for multilateral trading facilities.
Highlights
The analysis of stock prices and trading volume on ex-dividend dates is the subject of numerous articles in financial economics
There are no tax clienteles and since there is no systematic discrepancy between ex-date prices and dividend payments, we find economic, but not statistically significant, indications for short-term trading around ex-dates
Tax-free dividends are equivalent to capital reductions
Summary
The analysis of stock prices and trading volume on ex-dividend dates (hereafter ex-dates) is the subject of numerous articles in financial economics. Tax clientele theories state that abnormal returns on ex-dates result from tax-motivated trading by investors This would mean that the ex-date prices of stocks reflect tax-induced heterogeneity among long-term investors (Elton and Gruber 1970) or short-term traders (Michaely and Vila 1995). Elton and Gruber (1970) argue that the analysis of ex-date prices provides information about the marginal investor They find that stockholders in higher tax brackets appear to prefer capital gains over dividend income compared to those in lower tax brackets. Michaely and Vila (1995) show that a stock’s drop in price—the fall from closing cum price to closing ex price—is a function of tax heterogeneity across traders and risk They conclude that ex-date prices do not reflect the preference of a particular group of investors but rather result from the interaction between different investor groups trading around the ex-date. Tax clientele theories suggest that on average, the drop in stock prices should be less than the dividend payment if dividends are taxed more heavily than capital gains, and vice versa
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