Further Evidence on Dividend Yields and the Ex-Dividend Day Stock Price Effect

Abstract

Ex-dividend day stock price behavior supports discreteness and tax clientele effects. The effects are still found after the Tax Reform Act of 1986. Results reflect an effective tax advantage for capital gains taxes payable at realization, versus dividend taxes due quarterly. Evidence also supports short-term trader participation in the ex-day phenomenon when the difference between dividend income and the ex-dividend day price decrease exceeds transaction costs to trade. Results contradict prior research where a tax clientele effect is not found, but align with the same prior research when including a small number of contaminated observations.

JEL Classification: G12, G14, G35