Taxes, Order Imbalance and Abnormal Returns around the Ex-Dividend Day
46 Pages Posted: 12 Dec 2008 Last revised: 8 Jun 2016
There are 2 versions of this paper
Taxes, Order Imbalance and Abnormal Returns around the Ex-Dividend Day
Taxes, Order Imbalance and Abnormal Returns Around the Ex‐Dividend Day
Date Written: June 7, 2016
Abstract
A costly arbitrage model, developed for the Australian imputation tax system, shows that stocks paying dividends with a tax credit are likely targets for ex-dividend arbitrage. We show that order imbalance, based on the direct observation of buyer and seller initiated trades, is a key factor in price movements around the ex-dividend day. Buying pressure before the ex-dividend day aimed at capturing the dividend and tax credit leads to an increase in prices that subsequently reverse in the ex-dividend period. This effect is concentrated in those stocks distributing a tax credit with their dividend payments. The price pressure resulting from order imbalance is substantially higher around the ex-dividend day relative to the effect observed outside this period. Our results reject the model of Frank and Jagannathan (1998) that bid-ask bounce is responsible for the ex-day premium and provide support for explanations based on taxes, transaction costs and incomplete price adjustment on the ex-day.
Keywords: Dividends, franking credits, abnormal returns, volume, order imbalance
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
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