The Ex-Day Pricing of Dividends for REITs

Li, Oliver Zhen; Weber, David P.

doi:10.2139/ssrn.1002639

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The Ex-Day Pricing of Dividends for REITs

39 Pages Posted: 25 Jul 2007

See all articles by Oliver Zhen Li

David P. Weber

University of Connecticut - Department of Accounting

Date Written: July 2007

Abstract

REIT dividends can be divided into three components based on how they are taxed to the recipient shareholders: ordinary income, long-term capital gains, and return of capital. This variation in tax characteristics enables us to examine the cross-sectional pricing of dividends on the ex-days. Since the ordinary income component of dividends is tax penalized, it should lead to positive ex-day returns while the other two components should have limited effects. We provide evidence consistent with this argument. In particular, abnormal returns and trading volume around REIT ex-days appear to be driven by the component taxed as ordinary income, but not the other components. Our results support a tax-based explanation for the ex-day pricing of dividends and investor trading behavior.

Keywords: dividend taxes, ex-dividend day returns, tax-based trading, real estate investment trusts

JEL Classification: G12, G35, H24

Suggested Citation: Suggested Citation

Li, Oliver Zhen and Weber, David P., The Ex-Day Pricing of Dividends for REITs (July 2007). Available at SSRN: https://ssrn.com/abstract=1002639 or http://dx.doi.org/10.2139/ssrn.1002639