Tax-Induced Dividend Capturing
Oliver Zhen Li
National University of Singapore
March 1, 2010
I examine how institutions and individuals trade shares around ex-dividend days. I predict that institutions are more likely than individuals to capture dividends for tax purposes by buying shares of a stock before it goes ex-dividend. I infer the directions of trades and the identities of traders using trade and quote data. I find that both institutions and individuals increase their net buying activities on the last cum-dividend days, especially in high dividend yield stocks; and that institutions buy significantly more shares than individuals. There is no excess buying or selling of shares on the ex-dividend days. Further analysis suggests that dividend capturing activities are likely heavily driven by corporations. Finally, cum- and ex-day investor trading intensity, especially that from institutions, impacts the ex-day pricing of dividend in the predicted direction. These results suggest that institutions trade around ex-dividend days consistent with their tax preference.
Number of Pages in PDF File: 54
Keywords: Dividend, Ex-Dividend, Tax, Tax Avoidance
JEL Classification: G35, H26
Date posted: March 2, 2010
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