Buying the Dividend: Dividend Drop Ratios and Tax Theory in the Presence of Tax Exempt and Tax Indifferent Investors
27 Pages Posted: 17 Aug 2006
Date Written: December 2005
We calculate dividend drop ratios over periods with changing quotation and taxation frameworks to assess the veracity of competing explanations. We use intraday prices, adjusted for non-trading, to provide a more accurate picture of price changes due to dividend payments than those produced in previous literature. Intraday estimates for dividend drop ratios are consistently higher than those calculated with end of day prices. Further we find that stocks trading ex-dividend on average underperform the market by a large amount over the following month. We attribute this phenomenon to dividend capture trading by tax advantaged and tax indifferent market participants.
Keywords: Dividend drop ratio, dividend capture, tax arbitrage, ex-dividend
JEL Classification: G11, G10
Suggested Citation: Suggested Citation