Stock Market Behavior on Ex-Dividend Dates: The Case of Cum-Ex Transactions in Germany
Posted: 29 Apr 2017 Last revised: 20 Sep 2017
Date Written: April 28, 2017
This paper explores whether stock-market arbitrage exploits profit opportunities arising from tax fraud. We focus on so-called cum-ex trades. These trades rest on the issuance of withholding-tax certificates that can be used for a tax-credit or refund without previous withholding-tax payment. We provide a theoretical analysis showing that without false tax certificates cum-ex trades would be unprofitable. Furthermore, we show that if profit opportunities associated with the false tax certificates are exploited, cum-ex trading alters the price-drop ratio at the ex-dividend day. The empirical analysis provides evidence using data of German stocks for the years 2009 to 2015. Our identification strategy exploits variation in the withholding-tax liability of dividends as well as differences in the withholding-tax procedure over time. The results indicate that price-drop ratios at ex-dividend days can be explained by cum-ex trades. Consistent with cum-ex trading, the data also shows large increases in trading volumes around ex-dividend dates.
Keywords: Dividend taxes; Capital gains taxes; Price-drop ratio; Ex-dividend dates; Tax clienteles; Tax compliance; Tax fraud; Withholding tax; Tax crediting
JEL Classification: H25, H26, G12
Suggested Citation: Suggested Citation