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.     

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.     

Time Variation of Ex-Dividend Day Stock Returns and Corporate Dividend Capture: A Reexamination

This paper documents some empirical facts about ex-day abnormal returns to high dividend yield stocks that are potentially subject to corporate dividend capture. We find that average abnormal ex-dividend day returns are uniformly negative in each year after the introduction of negotiated commission rates and that time variation in ex-day returns during the negotiated commission rates era is consistent with corporate tax-based dividend capture. Ex-day returns are more negative when the tax advantage to corporate dividend capture is greatest and more positive when increases in transaction costs and risk reduce incentives to engage in corporate tax-based dividend capture.     

The valuation of American call options and the expected ex-dividend stock price decline

This study focuses on the ex-dividend stock price decline implicit within the valuation of American call options on dividend-paying stocks. The Roll (1977) American call option pricing formula and the observed structure of CBOE call option transaction prices are used to infer the expected ex-dividend stock price decline as a proportion of the amount of the dividend. The relative decline is shown to be not meaningfully different from one, confirming some recent evidence from studies which examined stock prices in the days surrounding ex-dividend.     

Ex-dividend day trading: Who,how, and why? : Evidence from the Finnish market

This study examines the ex-dividend day trading behavior of all investors in the Finnish stock market. Consistent with dynamic dividend clientele theories, investors with a preference for dividend income buy shares cum-dividend and sell ex-dividend; the reverse is true for investors with the opposite preference. Investors also engage in overnight arbitrage, earning on average a 2% overnight return on their invested capital. Trades at the investor-level reveal that idiosyncratic risk is an important determinant in the choice of stock for short-term ex-day trading. Furthermore, transaction costs and dividend yield jointly determine whether the volume of short-term trading activity is nonzero.     

Determinants of Corporate Dividend Capture

This paper uses ex-dividend day returns to show that corporate dividend capture in utility stocks depends upon transaction costs, the three month treasury bill rate, unsystematic risk and dividend yield. The paper finds that the data do not support the same determinants for dividend capture in non-utility stocks. Tests on data from before and after the Tax Reform Act of 1986 do not show conclusively that the Tax Reform Act reduced the prevalence of dividend capture.     

The early exercise of American puts

This paper shows that American puts on dividend paying stocks are most likely to be exercised either just after an ex-dividend date or just prior to expiration. At any other time the option to exercise an American put early may have less value. Thus, put writers and converters can predict when protection against premature exercise will be most valuable. The probability of early exercise is shown to be sensitive to managerial policy regarding the suspension of dividend payments, transaction costs, and interest rates. However, dividend payments are demonstrated to be the primary deterrent to early exercise.     

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.     

Do Price Discreteness and Transactions Costs Affect Stock Returns? Comparing Ex‐Dividend Pricing before and after Decimalization

By the end of January 2001, all NYSE stocks had converted their price quotations from 1/8s and 1/16s to decimals. This study examines the effect of this change in price quotations on ex‐dividend day activity. We find that abnormal ex‐dividend day returns increase in the 1/16 and decimal pricing eras, relative to the 1/8 era, which is inconsistent with microstructure explanations of ex‐day price movements. We also find that abnormal returns increase in conjunction with a May 1997 reduction in the capital gains tax rate, as they should if relative taxation of dividends and capital gains affects ex‐day pricing.     

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.     

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.     

Reduction of Constraints on Arbitrage Trading and Market Efficiency: An Examination of Ex-Day Returns in Hong Kong after Introduction of Electronic Settlement

Previous research documents positive ex-dividend day returns in excess of one percent in the unique institutional setting of Hong Kong, where neither dividends nor capital gains are taxed. Short-term arbitrage trades around the ex-day were hampered by physical settlement procedures. After the recent switch to an electronic settlement system, which enables such trades, ex-day abnormal returns have declined to an insignificant 0.17 percent. This drop is more pronounced for high-yield stocks, which are more likely to attract dividend capture trading. The evidence points to the crucial role of short-term traders in ensuring the pricing efficiency of financial markets.     

Ex-Day Price Behaviour, Market Microstructure and Settlement Costs

It is well documented that share prices on ex-dividend days drop by less than the value of the dividends paid. However, the explanations offered to date remain inconclusive. This study examines the behaviour of share prices on ex-dividend days using data from the UK after the introduction of the 1988 Income and Corporation Taxes Act. Following [10] we sub-divide the data conditional on the size of the dividend paid. We find that for the large dividend sub-sample, when the impact of market micro-structure is taken into account, the ex-dividend price drop is not significantly different to the value of the dividend paid.     

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.

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.     

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.     

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.     

EX‐DIVIDEND DAY PRICE BEHAVIOR OF EXCHANGE‐TRADED FUNDS

We document that for exchange‐traded funds (ETFs), the price falls on average by the dividend amounts on the ex‐dividend day, and there are significantly positive abnormal volumes. This is because trading in ETFs entails lower transaction costs and lower risk than trading in equity closed‐end funds (CEFs) and individual stocks. Similar results are also found for equity CEFs. However, regression analyses indicate that transaction costs and risk are indeed negligible for ETFs but not for equity CEFs and that risk remains important for a sample of stocks matched based on transaction costs. Overall, the results support the short‐term traders hypothesis.     

Dividends,taxes, and common stock prices: The ex-dividend day behavior of common stock prices before the income tax

This study examines the ex-dividend day behavior of common stock prices before the enactment of the federal income tax. On ex-dividend days during the pre-tax period, stock prices fell, on average, by the full amount of the dividend. The data are consistent with the hypothesis that (i) investors in the pre-tax period value dividends and capital gains as perfect substitutes and (ii) the differential taxation of dividends and capital gains has since caused investors to discount the value of taxable cash dividends in relation to capital gains.