Taxes, Order Imbalance and Abnormal Returns around the Ex-Dividend Day

46 Pages Posted: 12 Dec 2008 Last revised: 8 Jun 2016

See all articles by Andrew Ainsworth

Andrew Ainsworth

University of Wollongong - School of Accounting, Economics & Finance

Kingsley Y. L. Fong

University of New South Wales - School of Banking and Finance

David R. Gallagher

Rozetta Institute

Graham Partington

University of Sydney - School of Business - Finance Discipline; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

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

Ainsworth, Andrew and Fong, Kingsley Y. L. and Gallagher, David R. and Partington, Graham, Taxes, Order Imbalance and Abnormal Returns around the Ex-Dividend Day (June 7, 2016). Available at SSRN: https://ssrn.com/abstract=1314087 or http://dx.doi.org/10.2139/ssrn.1314087

Andrew Ainsworth (Contact Author)

University of Wollongong - School of Accounting, Economics & Finance ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia

Kingsley Y. L. Fong

University of New South Wales - School of Banking and Finance ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

David R. Gallagher

Rozetta Institute ( email )

Sydney

Graham Partington

University of Sydney - School of Business - Finance Discipline ( email )

Building H69
Sydney NSW, 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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