Marginal Stockholder Tax Effects and Ex-Dividend Day Behavior-Thirty-Two Years Later
24 Pages Posted: 3 Nov 2008
Date Written: October 2002
In 1970 Elton and Gruber (hereafter E&G) started an industry by studying the impact of taxes on investor decisions using the behavior of share prices around the ex-dividend date. E&G showed that if taxes enter investors decisions, then the fall in price on the ex-dividend day should reflect the post-tax value of the dividend relative to the post-tax value of capital gains on that day. Because dividends in most time periods are taxed more heavily than capital gains, the theory suggests that if taxes affect investor s choices, the fall in stock price should in general be less than the dividend.
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