Tax Versus Attention: The Ex-Date Experience in Taiwan

Abstract

This paper examines ex-date stock returns on the Taiwan Stock Exchange. The special features of Taiwan's tax code offer a sharp contrast between taxable and non-taxable distributions. Therefore, we are able to evaluate the relative importance of tax versus non-tax explanations for the ex-date phenomenon. We find that the tax effect is at best a minor explanation for abnormal returns on the ex dates. We argue that abnormal returns on the ex date exist, because these stocks attract the attention of small investors. A higher distribution rate of, or greater sentiment from investors for, a particular stock brings more attention and therefore a higher ex-date return. We find our evidence to be consistent with the attention hypothesis.