Abstract
The primary purpose of this paper is to examine the tax effect on foreign investors' trading behavior around ex-dividend days on the Taiwan Stock Exchange. We find that despite the tax disadvantage of participating in taxable dividend distributions, foreign investors still buy more before the ex-date and sell more on the ex-date or afterwards. Their trading behavior around the ex-date fully contradicts with the prediction of the tax hypothesis. As the distribution rate is higher, their order imbalances before the ex-date also increase, but decrease afterwards. The evidence implies that foreign investors are engaged in short-term arbitrage trading around ex-dividend days rather than tax-induced trading.
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