Abstract
REIT dividends can be divided into three components based on how they are taxed to the recipient shareholders: ordinary income, long-term capital gains, and return of capital. This variation in tax characteristics enables us to examine the cross-sectional pricing of dividends on the ex-days. Since the ordinary income component of dividends is tax penalized, it should lead to positive ex-day returns while the other two components should have limited effects. We provide evidence consistent with this argument. In particular, abnormal returns and trading volume around REIT ex-days appear to be driven by the component taxed as ordinary income, but not the other components. Our results support a tax-based explanation for the ex-day pricing of dividends and investor trading behavior.
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