Ex-Dividend Day Stock Price Behavior - The NASDAQ Evidence

46 Pages Posted: 5 Feb 2014 Last revised: 17 Mar 2014

See all articles by Shishir K. Paudel

Shishir K. Paudel

Alabama A&M University - College of Business and Public Affairs

Sabatino Silveri

University of Memphis - Fogelman College of Business and Economics

Date Written: March 2014

Abstract

We use dividend-paying Nasdaq-listed firms as a setting to test various explanations of the ex-day price anomaly. Similar to NYSE-listed firms, on average the prices of Nasdaq-listed firms drop by less than the dividend amount on the ex-day. However, the average price-drop is half that observed for NYSE-listed firms and translates to an imputed dividend tax rate that is double the average maximum tax rate over the sample period. In addition, we find the ex-day price-drop increases in dividend yield, opposite the prediction from a tax clientele explanation. Moreover, for non-taxable distributions we find prices behave in a similar manner to taxable distributions on the ex-day, again suggesting taxes are not the primary reason for the price behavior. In sum, we find little support for tax-based explanations. We also find little support for short-term trading and market microstructure explanations. Importantly, our results are robust to transaction costs as proxied by stock price, liquidity, volatility, firm size and bid-ask spread. We supplement our analysis by investigating a subset of firms that voluntarily switch from the Nasdaq exchange to the NYSE. The average price-drop for the switching firms is similar to the Nasdaq average prior to the switch and resembles the NYSE average immediately after the switch. This change in price behavior potentially reflects a changing investor base and suggests the marginal investor of Nasdaq dividend-paying firms places relatively less importance on dividends. Overall, our results call into question the various explanations of the ex-day anomaly. Any potential explanation also needs to account for the Nasdaq evidence.

Keywords: Dividends; Taxes; Asset pricing; Market microstructure; Transaction costs; Nasdaq; NYSE; Exchange switches

JEL Classification: G10; G12; G35; H20; H24

Suggested Citation

Paudel, Shishir K. and Silveri, Sabatino, Ex-Dividend Day Stock Price Behavior - The NASDAQ Evidence (March 2014). Available at SSRN: https://ssrn.com/abstract=2390114 or http://dx.doi.org/10.2139/ssrn.2390114

Shishir K. Paudel

Alabama A&M University - College of Business and Public Affairs ( email )

4900 Meridian Street North
Normal, AL 35762
United States
2563725064 (Phone)

Sabatino Silveri (Contact Author)

University of Memphis - Fogelman College of Business and Economics ( email )

3675 Central Avenue
Memphis, TN 38152
United States

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