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

38 Pages Posted: 13 Mar 2002

See all articles by Larry Bauer

Larry Bauer

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Steve Beveridge

Independent

Ranjini Jha

University of Waterloo - School of Accounting and Finance

Date Written: September 13, 2006

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

Suggested Citation

Bauer, Larry and Beveridge, Steve and Jha, Ranjini, The Dividend Puzzle: The Influence of Taxes, Tick Size and Short-Term Trading on Ex-Dividend Day Prices in Canada (September 13, 2006). Available at SSRN: https://ssrn.com/abstract=302935 or http://dx.doi.org/10.2139/ssrn.302935

Larry Bauer (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, NL A1B 3X5
Canada
709-864-8512 (Phone)

Steve Beveridge

Independent

No Address Available

Ranjini Jha

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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