The Dividend Puzzle: The Influence of Taxes, Tick Size and Short-Term Trading on Ex-Dividend Day Prices in Canada

Abstract

We differentiate among some of the contending hypotheses about ex-dividend day pricing by studying share price behavior in Canadian markets around the ex-dividend day during the period 1977-2000. Over this time, the tax regime switched from favoring capital gains to favoring dividends, and in 1996 exchanges decimalized and reduced minimum tick sizes. We rule out both tax and tick-size effects on ex-day behavior. In other words, no support is found for tax-induced pricing and therefore consequently dividend clienteles or for the Bali and Hite (1998) pricing model. While, we do not explore the impact of any other micro-structure effects, we find some evidence that short-term trading may be a factor in the market.

Keywords: ex-dividend day price formation, tax effects, tick-size effects, short-term trading effects

JEL Classification: G35