Ex-dividend Day Research Articles

The ex-dividend day stock price anomaly: evidence from the Greek stock market

This paper examines the ex-dividend stock price and trading volume behavior in the Greek stock market for the period 2000–2004. We use both standard event-study methodology and cross-sectional regression analysis in assessing the ex-dividend stock price anomaly. We find that stock prices drop less than the dividend amount. By examining abnormal returns as well as abnormal trading volume around the ex-dividend day, we find strong evidence of short-term trading, which is consistent with the presence of dividend-capturing activities around the ex-dividend day. The results from the cross-sectional regression analysis confirm that the short-term trading hypothesis explains the ex-dividend day stock price anomaly in Greece.

Stock Option Returns: A Puzzle

Under very weak assumptions, the expected returns of European call options must be positive and increasing in the strike price. This paper investigates the returns to call options on individual stocks that do not have an ex-dividend day prior to expiration. The main findings are that over the 1996 to 2005 period (1) out-of-the-money calls have negative average returns, and (2) the average returns of high strike calls are lower than those of low strike calls. The puzzling returns are robust to a number of variations in methodology, and are not due to a 'peso' problem. Finally, preliminary evidence is presented that is consistent with investor skewness-seeking contributing to the puzzling call returns.

Institutional Trading Around the Ex-Dividend Day

WThis paper uses the trading records of institutional equity funds to examine their ex-dividend trading behavior. There are two classes of funds in the study, which differ in their tax-induced preferences for dividends. The funds engage in both short-term and long-term trading about the ex-dividend date. In aggregate, the funds make excess sales cum-dividend and excess purchases ex-dividend. The availability of imputation tax credits, changes in tax incentives and the fund’s tax status all affect ex-dividend day trading as does the level of dividend yield and transaction costs.

Ex-dividend day trading: Who, how, and why?: Evidence from the Finnish market

This study examines the ex-dividend day trading behavior of all investors in the Finnish stock market. Consistent with dynamic dividend clientele theories, investors with a preference for dividend income buy shares cum-dividend and sell ex-dividend; the reverse is true for investors with the opposite preference. Investors also engage in overnight arbitrage, earning on average a 2% overnight return on their invested capital. Trades at the investor-level reveal that idiosyncratic risk is an important determinant in the choice of stock for short-term ex-day trading. Furthermore, transaction costs and dividend yield jointly determine whether the volume of short-term trading activity is nonzero.

Ex-Dividend Day Price and Volume: The Case of 2003 Dividend Tax Cut

We examine the impact of the 2003 dividend tax cut, which removes the differential taxation between dividends and capital gains for individual investors, on the ex-dividend day price and trading volume. We find the ex-dividend day price and volume are affected by taxes, risk, and transaction costs. The ex-dividend day price drop ratio (excess return) increases (decreases) and dividend clienteles weaken after the tax cut. Ex-dividend day abnormal volume among high dividend yield stocks decreases after the tax cut consistent with a diminished motivation for tax-induced trading. Our results suggest that individual investors have a measurable effect on the ex-dividend day price and trading volume.

The Ex-Dividend Day Stock Price Behavior: The Case of Portugal

This paper examines the ex-dividend day behavior of stock prices in the Lisbon Stock Market over the period 1990–1998, extending on international evidence and discussing the adequacy of competing theories, considering the Portuguese institutional environment. We find that on the ex-day stock prices fall by less than the dividend, which is in line with the findings of several studies based on US and non-US data. The main contributions of this paper are: (1) the rejection of a tax explanation for the stock price drop, because it is inconsistent with the Portuguese tax regime; (2) considering the very small stock price tick and the fact that dividends are always integer multiples of tick size, the discreteness hypothesis of Bali and Hite (Journal of Financial Economics 47(2):127–159, 1998) is also ruled out as a possible explanation for ex-day price movements. We find no evidence of tax related clientele effects. We propose that ex-day price behavior may be an anomaly, reflecting a less than efficient market with low liquidity levels, price stickiness, and insipid arbitrage trading.

Tax Heterogeneity and Trading Volume Around the Ex-Dividend Day: Estonian Evidence

This paper examines the trading pattern around the ex-dividend day in the Estonian stock market between 2000 and 2006. An analysis of the Estonian income tax law confirmed that despite its simplicity there exists differential treatment of capital gains and dividends as well as tax heterogeneity among investors. An empirical analysis of the trading data showed a statistically significant abnormal trading volume around the ex-dividend day. By putting these two aspects together and investigating short-term changes in ownership structure around the ex-dividend day it can be concluded that in the Estonian stock market investors use dynamic tax-induced trading strategies around the ex-dividend day. The occurrence of the learning effect and avoidance of transaction costs were also revealed by an analysis of these transactions.

Failure to exercise call options: An anomaly and a trading game

In the US, exchange-traded options are unprotected from cash dividend payments on the underlying stock. Consequently, it may become optimal to exercise deep in-the-money call options just prior to the ex-dividend day. In this study, we examine the extent to which option holders fail to exercise their call options on the day prior to an ex-dividend day when it is optimal to do so. Using a sample of call options on stocks with quarterly dividends of at least a penny per share during the period January 1996 through April 2006, we find that more than half of outstanding long positions go unexercised. We estimate that this failure to exercise has caused call option holders to lose over $491 million over a ten-year period. We also show how market makers capture the lion's share of the proceeds by using a dividend spread trading strategy.

Taxes and Foreign Investors' Trading Behavior Around Ex-Dividend Days

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.

Ex-Dividend Day Stock Price Anomaly: Evidence from Greece

This paper examines the ex-dividend price and trading volume behaviour in the Greek stock market. The examined period spans over the period 2000-2004. We use both the standard event study methodology and the regression analysis in order to assess the ex-dividend stock price anomaly. We find that stock prices drop less by than the dividend amount. By examining abnormal returns as well as abnormal trading volume around the ex-dividend day, we find strong evidence of short-term trading which is consistent with the presence of dividend-capturing activities around the ex-dividend day. The results from the cross-sectional regression analysis confirm that the short-term trading hypothesis explains the ex-day stock price anomaly in Greece.

Failure to Exercise Call Options: An Anomaly and a Trading Game

In the U.S., exchange-traded options are unprotected from cash dividend payments on the underlying stock. Consequently, it may become optimal to exercise deep in-the-money call options just prior to the ex-dividend day. In this study, we examine the extent to which option holders fail to exercise their call options on the day prior to an ex-dividend day when it is optimal to do so. Using a sample of call options on stocks with quarterly dividends of at least a penny per share during the period January 1996 through April 2006, we find that more than half of outstanding long positions go unexercised. We estimate that this failure to exercise has caused call option holders to lose over $491 million over a ten-year period. We also show how market makers capture the lion's share of the proceeds by using a dividend spread trading strategy.

REITs, Decimalization, and Ex-dividend Stock Prices

The ex-dividend pricing of real estate investment trust (REIT) stocks under fractional and decimal pricing regimes is investigated. For REITs, with the move from discrete to decimal pricing, the price drop on the ex-dividend day approaches the dividend amount, the ex-date abnormal return decreases, the spread-to-dividend ratio declines, abnormal trading volume increases, and the potential erroneous appearance of a tax-clientele effect is diminished. Discreteness and other transaction costs are reduced with decimalization implying that part of the persistence in the appearance of the tax-clientele effect when modeling ex-dividend stock pricing might be generated by the interaction between transaction costs, dividend amount, and yield.

Ações de empresas brasileiras e suas ADRs: uma nota sobre datas ex-dividend

Este trabalho analisou o comportamento das acoes de empresas brasileiras e de suas ADRs listadas em bolsa, em periodos proximos ao 1o dia ex-dividend. Analisando os retornos, pode-se perceber que as acoes locais tiveram um desempenho medio superior ao das ADRs nos dias anteriores a data do evento. Isto sugere que os investidores preferem comprar acoes as ADRs em funcao da menor tributacao dos dividendos no Brasil. Essa tendencia se inverte na data do evento, quando as ADRs obtiveram um retorno superior ao das acoes locais. A analise dos precos demonstrou que as ADRs sao negociadas, em media, com um premio em relacao as suas respectivas acoes.

An Empirical Examination of Institutional Trading Around the Ex-Dividend Day in Australia

An Empirical Examination of Institutional Trading Around the Ex-Dividend Day in Australia

Investigation of the costly-arbitrage model of price formation around the ex-dividend day in Norway

Abstract We estimate the costly-arbitrage model of Boyd and Jagannathan [Boyd, John, and Jagannathan, Ravi, 1994, Ex-Dividend Price Behavior of Common Stocks, Review of Financial Studies 7, 711–741.] using Norwegian stock market data. Taxable distributions take place at two separate dates, one that entails the distribution of an imputation-tax credit and another the distribution of the cash dividend. We find that the costly-arbitrage model is consistent with observed stock returns around the ex-dividend day, but the model cannot explain the return patterns around the distribution of the tax credit. We conclude that uncertainty about the cash flows prevents arbitrage.

The Chilean ex-dividend day

In a perfect capital market ex-dividend day share prices should fall by exactly the amount of the dividend. However, empirical evidence shows that stock prices drop by less than the dividend amount. The most popular explanations for this anomaly are tax or market microstructure related. We examine ex-dividend day behavior of stocks on the main Chilean exchange. We find an average price drop to dividend ratio of 0.815. Given the absence of good market microstructure arguments for the Chilean case, we explore if the tax clientele theory has support. The tax story indicates that higher dividend yields should produce price drop to dividend ratios closer to one, but we find no relation between dividend yield and this ratio. The evidence suggests that arbitrageur transactions costs may be the friction that restricts ex-day price adjustment in Chile.

The Impact of the Abolition of tax credit on ex-dividend day abnormal returns in the united kingdom (uk) market

The ex-dividend day returns are composed of the capital gains component and the dividends component. This study mainly examines the relationship between the 1997 abolition of the tax-credit and the ex-dividend day abnormal stock returns in the UK market (London Stock Exchange). The 1997 abolition of the tax credit on dividend effectively reduced the income of pension funds and other tax-exempt shareholders who had a strong preference for dividends. This study finds that the ex-day abnormal returns (AR) declined from +0.0580 percent during the pre-abolition periods to -0.1459 percent during the post-abolition periods. This decline is statistically significant with a t-value of 2.0431. From these results it would appear that the ex-dividend day AR changed following the 1997 abolition of tax credits on dividends. Moreover the comparison tests of ex-day drop-off ratios between pre-and post-abolition periods show that drop-off ratios for all dividend yield groups increased significantly from 0.519 in the pre-abolition periods to 0.574 over the post-abolition periods with a t-value of 2.183. Thus, the decrease on ex-day AR was further supported by a significant increase in the average price-drop to dividend ratios.The decline in the ex-day AR for the post-abolition periods seems to be driven primarily by quintile 5 (the highest dividend yield quintile). Quintile 5 exhibits strong dividend preference and this preference is likely caused by the imputation system that provides a tax advantage to the tax exempt shareholders. This finding appears to suggest that the highest dividend yield securities are likely to be held by tax-exempt investors such as pension funds that were affected by the abolition of the tax credits on dividend.

The Ex-Dividend Day Stock Price Anomaly: Evidence from Denmark

We examine ex-dividend day behavior on the Copenhagen Stock Exchange. We report price drop ratios of 25%, well below the 70-80% from U.S. data. The tax clientele hypothesis predicts ratios between 57% and 126% based on the Danish tax structure. Our results conflict with tax and tick size models, but they are consistent with limit order adjustment explanations from Dubofsky (1992) and Jakob and Ma (2004, 2005). An unusual average price trading opportunity also facilitates the low ratios. Average price trades have no direct supply or demand impact in the market, and therefore do not drive the ratios toward one.

A Re-examination of Ex-Dividend Day Price Movements: Evidence from ADR Market

A Re-examination of Ex-Dividend Day Price Movements: Evidence from ADR Market

The Effect of Taxes, Trading Frictions, and Fund Premium on the Ex-dividend Day Price Behavior of Closed-end Funds

The Effect of Taxes, Trading Frictions, and Fund Premium on the Ex-dividend Day Price Behavior of Closed-end Funds