The Behavior of Stock Prices on the Ex-Day of an Emerging Market; Evidence from the Dhaka Stock Exchange

Abstract

The empirical results on the tax clientele effect on the pricing of shares that pay dividend still remain inconclusive due to the variations in the tax system in different countries. We investigate the ex-dividend day stock prices of the firms listed on the Dhaka Stock Exchange (DSE) where there exists a higher tax rate on dividend than on capital gains. The results based on the announcement period from 2005 to 2011 allow us to explain to what extent tax has an impact on the ex-day stock prices behaviour in an emerging market. The findings suggest that the stock prices drop is significantly lower than the after tax dividend amount. Furthermore, our results indicate that dividend yield and taxes are not main determinants to trade around the ex-day. The test results suggest that the drop of stock prices on the ex-day on the Dhaka Stock Exchange is not due to the tax or the transaction costs but the investor’s valuation assumptions to determine the equilibrium stock prices.