Why Do Stock Prices Drop by Less than the Amount of the Dividend? Evidence from a Unique Environment

23 Pages Posted: 30 Aug 2014

See all articles by Khamis Al-Yahyaee

Khamis Al-Yahyaee

Sultan Qaboos University; Economic Research Forum

Multiple version iconThere are 2 versions of this paper

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

Al-Yahyaee, Khamis, Why Do Stock Prices Drop by Less than the Amount of the Dividend? Evidence from a Unique Environment (August 29, 2014). Emerging Markets Finance and Trade, Vol. 50, No. 5, 2014, Available at SSRN: https://ssrn.com/abstract=2489009

Khamis Al-Yahyaee (Contact Author)

Sultan Qaboos University ( email )

P.O.Box 20
Al Khoudh, Muscat, 123
Oman
+(968)24141833 (Phone)
+(968)24414043 (Fax)

Economic Research Forum ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo
Egypt
+202 333 18 600 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
80
Abstract Views
638
Rank
308,114
PlumX Metrics