The Tax Impact on the Ex-Dividend Dates: Evidence from European Firms

Abstract

In this paper we examine the behaviour of share prices around the ex-dividend dates across four major European countries: France, Germany, Italy and the UK. We analyse the tax system and tax reforms in each country and test the hypothesis that if taxation is the sole determinant of ex-day prices, then differences in ex-day returns across these countries should be directly related to each country's tax differentials between dividends and capital gains. We find that in all countries ex-day returns are positive and significant and in countries where the differential between dividends and capital gains is high (low), ex-day returns are high (low). We also find that changes in the tax systems that affect taxes on dividend and/or capital gains altered significantly ex-day returns. Further tests indicate that ex-day returns are not affected by transaction cost and market microstructure effects. Our results provide support for the tax hypothesis.