Variation in ex day dividend pricing: Myth or reality?
Recent price discreteness based reinterpretation of ex day price adjustments motivates our analysis of dividend pricing around the elimination of fixed commissions in May 1975 and the tax reform acts of 1984 and 1986. Our results are consistent with short-term, tax-neutral traders (arbitrageurs) being the marginal price setters on ex dividend days. In a regression framework, the proportional price drop varies one-for-one with the rounded down dividend scaled by price, and the intercept captures bid-ask spread effects. We document evidence of necessary and sufficient conditions against taxclienteles. We also reconcile some prior conflicting results in the literature. (JEL G12, G35)
KeywordsDividend Yield Price Drop Tick Size Dividend Amount Dividend Price
Unable to display preview. Download preview PDF.
- Brennan, Michael. 1970. “Taxes, Market Valuation and Corporate Financial Policy.”National Tax Journal 23: 417–427.Google Scholar
- Glosten, Lawrence. 1994. “Competition and the Set of Allowable Prices.” Working paper. New York: Columbia University.Google Scholar
- Graham, John, Roni Michaely, and Michael R. Roberts. 2002. “Do Price Discreteness and Transaction Costs Affect Stock Returns? Comparing Ex-Dividend Pricing Before and After Decimalization.” Working paper. Durham, NC: Duke University.Google Scholar
- Han, Ki C. 1994. “The Effect of the 1986 Tax Reform Act on Ex-Dividend Day Return Behavior.”Journal of Financial Research 17: 175–186.Google Scholar
- Harris, Larry. 2003.Trading and Exchanges: Market Microstructure for Practitioners. New York: Oxford University Press.Google Scholar
- Maki, Dean M. 2001. “Household Debt and the Tax Reform Act of 1986.”American Economic Review 91: 305–319.Google Scholar