Ex-Dividend Day Behaviour in the Absence of Taxes and Price Discreteness
Sultan Qaboos University
Toan M. Pham
University of New South Wales (UNSW) - School of Banking and Finance
Terry S. Walter
University of Technology, Sydney - School of Finance and Economics; Financial Research Network (FIRN)
November 1, 2008
International Review of Finance, Vol. 8, pp. 103-123
Second Singapore International Conference on Finance 2008
We examine the ex-dividend day behaviour in a unique setting where (1) there are neither taxes on dividends nor on capital gains, (2) stock prices have been decimalized, (3) dividends are distributed annually, and (4) we have data that enable us to examine bid-ask bounce effects. In this economy, any price decline that is smaller than the dividends can not be attributed to taxes and price discreteness. Like previous studies, we find that the stock price drops by less than the amount of dividends and there is a significant positive ex-day return. By examining abnormal volumes around the ex-dividend day, we find no evidence of short-term trading. We are able to account for our results using market microstructure models. When the impact of market microstructure is taken into account, the ex-dividend drop is not significantly different to the value of the dividend paid.
Keywords: dividends, bid-ask spread, tax effects, market microstructure, tick size
JEL Classification: G35Accepted Paper Series
Date posted: February 15, 2008 ; Last revised: July 19, 2010
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