Taxes, Order Imbalance and Abnormal Returns Around the Ex‐Dividend Day

31 Pages Posted: 17 Sep 2018

See all articles by Andrew Ainsworth

Andrew Ainsworth

University of Wollongong - School of Accounting, Economics & Finance

Kingsley Y.L. Fong

University of South Wales

David R. Gallagher

Rozetta Institute

Graham Partington

University of Sydney - School of Business - Finance Discipline; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2008

Abstract

A costly arbitrage model, developed for the Australian imputation tax system, shows that stocks paying dividends with a tax credit are likely targets for ex‐dividend arbitrage. We show that order imbalance, based on the direct observation of buyer and seller initiated trades, is a key factor in price movements around the ex‐dividend day. Buying pressure before the ex‐dividend day aimed at capturing the dividend and tax credit leads to an increase in prices that subsequently reverse in the ex‐dividend period. This effect is concentrated in those stocks distributing a tax credit with their dividend payments. The price pressure resulting from order imbalance is substantially higher around the ex‐dividend day relative to the effect observed outside this period. Our results reject the model of Frank and Jagannathan ([Frank, M., 1998]) that bid‐ask bounce is responsible for the ex‐day premium and provide support for explanations based on taxes, transaction costs, and incomplete price adjustment on the ex‐day.

Suggested Citation

Ainsworth, Andrew and Fong, Kingsley Y.L. and Gallagher, David R. and Partington, Graham, Taxes, Order Imbalance and Abnormal Returns Around the Ex‐Dividend Day (September 2008). International Review of Finance, Vol. 18, Issue 3, pp. 379-409, 2018, Available at SSRN: https://ssrn.com/abstract=3244746 or http://dx.doi.org/10.1111/irfi.12155

Andrew Ainsworth (Contact Author)

University of Wollongong - School of Accounting, Economics & Finance ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia

Kingsley Y.L. Fong

University of South Wales

Caerleon Campus
Lodge Road
Pontypridd, CF37 1DL
United Kingdom

David R. Gallagher

Rozetta Institute ( email )

Sydney

Graham Partington

University of Sydney - School of Business - Finance Discipline ( email )

Building H69
Sydney NSW, 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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