DRIPs and the Dividend Pay Date Effect

74 Pages Posted: 7 Nov 2012 Last revised: 22 Nov 2015

See all articles by Henk Berkman

Henk Berkman

University of Auckland - Business School

Paul D. Koch

Iowa State University - Finance Department; Iowa State University - Finance Department

Date Written: September 22, 2015

Abstract

On the day that dividends are paid we find a significant positive mean abnormal return that is completely reversed over the following days. This dividend pay date effect has strengthened since the 1970s, and is consistent with the temporary price pressure hypothesis. The pay date effect is concentrated among stocks with dividend reinvestment plans (DRIPs), and is larger for stocks with a higher dividend yield, greater DRIP participation, and greater limits to arbitrage. Over time, profits from a trading strategy that exploits this behavior are positively related to the dividend yield and spread, and negatively associated with aggregate liquidity.

Keywords: market efficiency, dividend, anomaly, dividend reinvestment plan, retail investors, sentiment, transaction costs, short sales, institutional ownership

JEL Classification: D82, G14, G19

Suggested Citation

Berkman, Henk and Koch, Paul D., DRIPs and the Dividend Pay Date Effect (September 22, 2015). Forthcoming, Journal of Financial and Quantitative Analysis (JFQA), 2016. Available at SSRN: https://ssrn.com/abstract=2172448 or http://dx.doi.org/10.2139/ssrn.2172448

Henk Berkman (Contact Author)

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Paul D. Koch

Iowa State University - Finance Department

Ivy College of Business
Ames, IA 50011
United States
5152942491 (Phone)

HOME PAGE: http://https://www.business.iastate.edu/directory/pkoch/

Iowa State University - Finance Department

Ames, IA 50011-2063
United States
5152942491 (Phone)

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