Why Do Stock Prices Drop by Less than the Amount of the Dividend? Evidence from a Unique Environment
23 Pages Posted: 30 Aug 2014
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Why Do Stock Prices Drop by Less than the Amount of the Dividend? Evidence from a Unique Environment
Date Written: August 29, 2014
Abstract
We investigate the effect of a lack of an automated limit order adjustment mechanism on ex-dividend day stock price behavior in a unique environment in which there are no taxes on dividends and capital gains. We find that overnight drop in the ask price is smaller than the overnight drop in the bid price. In addition, we find that average price drops are smaller than the dividend amount for all dividend sizes. We also find no evidence of a sawtooth-shaped relationship between the dividend amount and the ex-day price drop. These results are generally consistent with a lack of an automated limit order adjustment mechanism.
Keywords: dividends, limit order, market microstructure, tax effects
JEL Classification: G15, G35
Suggested Citation: Suggested Citation