Lost in translation: Delayed ex-dividend price adjustments of Hong Kong ADRs

Previous research documents that Hong Kong stocks have a full ex-dividend price adjustment consistent with dividends and capital gains being tax free. We examine ex-dividend price behavior of Hong Kong ADRs to assess the impact of differing tax environments in US and Hong Kong. These ADRs typically go ex-dividend before their underlying stock. They experience significant abnormal returns of 1.16% on their ex-day; the average ex-day price drop is only 30% of the dividend. However, ADR prices drop when the underlying stock goes ex-dividend subsequently. The cumulative ADR price drop is equal to the dividend. Thus, the ADR ex-dividend adjustment resembles that of the underlying stock, consistent with home country tax laws governing ADR price behavior. Neither liquidity nor transaction costs can explain the anomalous delayed ex-dividend adjustment of ADRs.     

The impact of nominal stock price on ex-dividend price responses

In this paper, we examine whether nominal stock price can help to explain the ex-dividend day anomaly where stock prices drop by less than the dividend amount on the ex-dividend date. We find that stocks with lower nominal prices have ex-dividend day price drops that are more consistent with theoretical predictions based on an efficient market. After controlling for factors that have been previously documented to influence ex-dividend day stock price behavior, price-drop-to-dividend ratios are closer to one for lower priced stocks. To further explore this phenomenon, we examine the change in the price-drop-to-dividend ratio around stock splits. Firms that split their shares have a larger price-drop-to-dividend ratio after the split, and companies that reverse split their shares have a smaller price-drop-to-dividend ratio after the split. Our evidence indicates that ex-dividend day stock price behavior is influenced by the nominal price of a share and that this relation could also influence the decision to split a firm’s shares.     

Ex-dividend date stock behavior and the clientele effect: Evidence around a tax reduction

This study analyzes the behavior of stock prices around the ex-dividend date focusing on the effects of a major tax reduction. Using the 40 most heavily traded shares on the Santiago Stock Exchange, the study evaluates price drop ratios using various measures of ex-dividend day prices. The findings indicate that the dividend tax reduction has an effect on the price drop ratio; this result is consistent with the clientele effect hypothesis.     

The ex-dividend day stock price behavior in the Chinese stock market

This paper analyzes the ex-dividend day stock price behavior in the Chinese stock market. This market allows to examine the impact of tax effects while keeping any microstructure factors constant. The findings from non-taxable stocks show that their price, on the ex-dividend day, falls by an amount that is not statistically different from the dividend. For the taxable sample, stock prices of small dividend yield stocks fall proportionally to the dividend paid. For the large dividend yield stocks, the price adjustment depends on the effective tax rate on dividend income. The overall findings are consistent with the tax hypothesis.     

The Ex-Dividend Day Behavior of Stock Prices: A Re-Examination of the Clientele Effect

Past studies have documented an ex-dividend day price drop which is less than the dividend per share and positively correlated with the corresponding dividend yield. In contrast to prior work, we show that, without additional information, the marginal tax rates cannot be inferred from this phenomenon which is, therefore, not necessarily the result of a tax induced clientele effect. Despite adjustments for potential biases in earlier work, however, the correlation between the ex-dividend relative price drop and the dividend yield is still positive which is consistent with a tax effect and a tax induced clientele effect.     

Short selling around dividend announcements and ex-dividend days

We examine short selling around dividend announcements and ex-dividend dates. Contrary to our initial expectation, we do not find abnormally high short-selling activity prior to announced dividend decreases, which runs counter to the argument that short sellers have the ability to acquire private information before its public dissemination. However, we find that the common negative relation between current short selling and future daily returns prior to unfavorable dividend announcements is similar to the negative relation during non-event times, suggesting that dividend announcements do not provide unusual trading opportunities for informed traders (Gonedes, 1978, and Benartzi et al., 1997). Around ex-dividend dates, we do find abnormal short selling, which may be explained by the return pattern around ex-dividend days documented by Lakonishok and Vermaelen (1986), who suggest that demand for a particular stock by dividend capture traders drives stock prices above their fundamental value thus providing a profitable trading opportunity for short sellers. Consistent with this conjecture, we find that both the level of short selling and the return predictability of short selling is markedly higher on and after the ex-dividend day than during non-event times.     

Taxes and dividends: The UK evidence

This paper provides empirical evidence on the simultaneous effects of both corporation and personal income taxes on dividend payment adjustments and on the behaviour of share prices on the ex-dividend dates. The results show that companies set their dividend policies to minimise their tax liability and to maximise the after-tax return of their shareholders. In particular, firms that are unable to deduct the advanced corporation tax from their tax liability are found to pay low dividends. In addition, consistent with the tax hypothesis, we find that the differential taxation of dividends and capital gains results in a decrease in ex-day share prices by significantly less than the amount of the dividend. There is no evidence of a tax-induced dividend clientele.     

Ex-dividend price behavior of common stocks

This study examines common stock prices around ex-dividend dates.Such price data usually contain a mixture of observations -some with and some without arbitrageurs and/or dividend capturersactive. Our theory predicts that such mixing will result ina nonlinear relation between percentage price drop and dividendyield - not the commonly assumed linear relation. This predictionand another important prediction of theory are supported empirically.In a variety of tests, marginal price drop is not significantlydifferent from the dividend amount. Thus, over the last severaldecades, one-for-one marginal price drop has been an excellent(average) rule of thumb.     

Ex-Day Behavior: Tax or Short-Term Trading Effects

This study examines the behavior of share prices around the ex-dividend dates before and after the introduction of the 1988 Income and Corporation Taxes Act that reduced substantially the tax differential between dividends and capital gains in the United Kingdom. We find that, in the pre-1988 period when the differential taxation of dividends and capital gains is high, ex-day returns are positive and significant. In contrast, in the post-1988 period, ex-day returns are, in most cases, negative and insignificant. Further analysis reveals that, while ex-day returns are significantly related to dividend yield and to the length of the settlement period, they are not affected by the commonly used measures of transaction costs, such as the bid-ask spread and trading volume, or by the day of week, month of the year, type of dividend distribution, or number of days to the actual receipt of the cash dividend. We conclude that taxation affects significantly ex-day share prices in the United Kingdom.     

Dividend Size, Yield, Clienteles and REITs

Dividend size and dividend yield are typically highly correlated which substantially hinders the empirical assessment of ex-dividend stock pricing. The ability to disentangle the joint effect of dividend yield and dividend size on ex-dividend stock prices is thus of central importance in assessing existing theories. Fortunately, the REIT asset class provides data having a low correlation between dividend size and dividend yield allowing for a cleaner assessment of the extant theories. Evidence from the present study indicates that results that are typically interpreted as confirmatory of the tax-induced clientele effect may be spurious. Instead, transaction costs and limit order adjustments are likely the determinants of the observed relationships between the change in price to dividend ratio, dividend yield, and dividend size.     

Dividend Clienteles, the Tax-Clientele Hypothesis, and Utilities

Studies of ex-dividend day behavior have detected dividend-clientele effects. The ratio of the ex-day price drop to the dividend is typically less than unity and correlated with dividend yield. The tax-clientele hypothesis attributes these effects to personal taxation. This study shows that, when studied separately, neither utilities nor nonutilities exhibit the correlation between yield and ex-dividend day price drop predicted by the tax-clientele hypothesis. Only by combining utility and nonutility data are the traditional correlations observed. Results are consistent with some sort of dividend-clientele effect but are inconsistent with tax clienteles.     

Tax-Induced Trading and the Identity of the Marginal Investor: Evidence from Sweden

Abstract

Changes in the Swedish tax code during the 1990s were structured in a way that offers an opportunity to test whether ex-dividend prices were determined by the taxation of domestic individual investors. The results presented in this paper indicate that ex-dividend prices were not influenced by the relatively large tax changes for domestic individual investors. In addition, there was no evidence that the taxation of domestic individual investors influenced ex-dividend prices for any specific dividend yield group.     

Effects of investor tax heterogeneity on stock prices and trading behaviour around the ex-dividend day: the case of Australia

Using a sample of Australian stocks during the 1996–2014 period, this study examines how tax heterogeneity between domestic and foreign investors affects trading behaviour and stock prices around the ex-dividend day. Domestic investors prefer dividends and tend to buy stocks cum-dividend and sell them ex-dividend whereas foreign investors tend to trade in the opposite direction. Abnormal trading turnover increases with tax heterogeneity. Moreover, stocks with a larger domestic investor base are associated with a higher price drop-off ratio on the ex-dividend day and higher market value of franking credits. Overall, our findings support the dynamic dividend clientele hypothesis.     

Ex-Dividend Day Stock Price Behavior: The Case of the 1986 Tax Reform Act*

This paper analyzes the behavior of stock prices around ex-dividend days after the implementation of the 1986 Tax Reform Act that dramatically reduced the difference between the tax treatment of realized long-term capital gains and dividend income in 1987 and completely eliminated the differential in 1988. We show that this tax change had no effect on the ex-dividend stock price behavior, which is consistent with the hypothesis that long-term individual investors have no significant effect on ex-day stock prices during this time period. The results indicate that the activity of short-term traders and corporate traders dominates the price determination on the ex-day.     

Efficient option pricing on stocks paying discrete or path-dependent dividends with the stair tree

Pricing options on a stock that pays discrete dividends has not been satisfactorily settled because of the conflicting demands of computational tractability and realistic modelling of the stock price process. Many papers assume that the stock price minus the present value of future dividends or the stock price plus the forward value of future dividends follows a lognormal diffusion process; however, these assumptions might produce unreasonable prices for some exotic options and American options. It is more realistic to assume that the stock price decreases by the amount of the dividend payout at the ex-dividend date and follows a lognormal diffusion process between adjacent ex-dividend dates, but analytical pricing formulas and efficient numerical methods are hard to develop. This paper introduces a new tree, the stair tree, that faithfully implements the aforementioned dividend model without approximations. The stair tree uses extra nodes only when it needs to simulate the price jumps due to dividend payouts and return to a more economical, simple structure at all other times. Thus it is simple to construct, easy to understand, and efficient. Numerous numerical calculations confirm the stair tree's superior performance to existing methods in terms of accuracy, speed, and/or generality. Besides, the stair tree can be extended to more general cases when future dividends are completely determined by past stock prices and dividends, making the stair tree able to model sophisticated dividend processes.     

REITs,Decimalization, and Ex-dividend Stock Prices

The ex-dividend pricing of real estate investment trust (REIT) stocks under fractional and decimal pricing regimes is investigated. For REITs, with the move from discrete to decimal pricing, the price drop on the ex-dividend day approaches the dividend amount, the ex-date abnormal return decreases, the spread-to-dividend ratio declines, abnormal trading volume increases, and the potential erroneous appearance of a tax-clientele effect is diminished. Discreteness and other transaction costs are reduced with decimalization implying that part of the persistence in the appearance of the tax-clientele effect when modeling ex-dividend stock pricing might be generated by the interaction between transaction costs, dividend amount, and yield.      

Outperformance Certificates: analysis, pricing, interpretation, and performance

In this paper we introduce a new financial product named Outperformance Certificates. We study the €43 billion sample by examining 1,507 issues of the certificates outstanding in August 2005 issued by banks in Europe. We present formulas to price the certificates and empirically examine the profits in the primary market for issuing the certificates. We find that issuance of the certificates is profitable for the issuers in our sample. Issuers sell the certificate at prices 3–5 % above the fair value based upon the components of the underlying assets. We also find that the dividend yields and ex-dividend dates play an important role in the profitability of the certificates. The underlying securities tend to have high dividend yield and large market capitalization. We also find the certificates tend to mature soon after the ex-dividend dates of the underlying assets.     

Dividend Policies and Price-Volume Reactions to Cash Dividends on the Stock Market: Evidence from the Istanbul Stock Exchange

This study examines the effects of cash dividend payments on stock returns and trading volumes in the stock market. It also investigates whether there is any difference in the investment behavior of investors with respect to the dividend pay out ratio and size in the Istanbul Stock Exchange (ISE)from 1995 to 2003. Prices start to rise a few sessions before cash dividend payments, and on the ex-dividend day, they fall less than do dividend payments, finally decreasing in the sessions following the payment. Trading volume shows a considerable upward shift before the payment date and, interestingly, is stable after Thus, cash dividends influence prices and trading volumes in different ways before, at, and after payment, providing some profitable active trading strategy opportunities around the ex-dividend day. The findings support price-volume reaction discussions on the divident payment date and the significant effect of cash dividends on the stock market.     

The ex-dividend day stock price anomaly: evidence from the Greek stock market

This paper examines the ex-dividend stock price and trading volume behavior in the Greek stock market for the period 2000–2004. We use both standard event-study methodology and cross-sectional regression analysis in assessing the ex-dividend stock price anomaly. We find that stock prices drop less than the dividend amount. By examining abnormal returns as well as abnormal trading volume around the ex-dividend day, we find strong evidence of short-term trading, which is consistent with the presence of dividend-capturing activities around the ex-dividend day. The results from the cross-sectional regression analysis confirm that the short-term trading hypothesis explains the ex-dividend day stock price anomaly in Greece.

AN INDIRECT TEST FOR DIVIDEND RELEVANCE

This paper provides an indirect test of dividend relevance conducted in periods that straddle the tax law changes effected by the Tax Reform Act of 1986. Using the abnormal ex-dividend day return to proxy for the tax penalty of dividends, I find a negative relation between changes in this tax penalty and changes in dividends paid. This result is consistent with corporations' equating, at the margin, the costs of dividend payout to its benefits. Hence, this is indirect evidence of dividend relevance.