The Settlement Period Effect in Stock Returns around the Dividend Payment Days

Abstract

The T 3 settlement rule for stock trades allows the dividend-eligible investors to give buy orders on the third trading day preceding the dividend payment day (day T-3) for a trade to be settled on the dividend payment day (day T). I document significant positive abnormal returns equal to 24 bps per day (48% per year) on day T and 9 bps per day (18% per year) on day T-3. This suggests that some investors take advantage of T 3 settlement rule. The abnormal returns and volume are higher for high dividend yield stocks, illiquid stocks, and stocks with higher institutional holdings.