Taxes and Ex-Day Returns: Evidence from UK and Continental Europe

Abstract

The purpose of the paper is to analyse the tax systems and tax reforms in France, Germany, Italy and UK and test the hypothesis that ex-day returns are related to each country's tax differential between dividends and capital gains. Consistent with the tax hypothesis, the results indicate that in countries where the differential between dividends and capital gains is high (low), ex-day returns are high (low) and changes in the tax systems that affect taxes on dividend and/or capital gains altered significantly ex-day returns. The short-term traders and market macrostructure factors do not have a strong impact on ex-day returns.

Keywords: Income and capital gains taxes in Europe, Ex-day pricing, Short-term trading, market microstructure.

JEL Classification: G12, G35