The Ex-Dividend Day Behavior of Canadian Stock Prices: Tax Changes and Clientele Effects

With some simple assumptions the ex-dividend day price drop and the associated dividend can be used to measure the market's marginal tax rate. Previous research has estimated the implied tax rate for the U.S. This paper extends the analysis to Canada, where the tax treatment of dividends and capital gains is completely different from that in the U.S. The paper also presents estimates from 1970–80 to include four distinct periods when the tax treatment was different. Hence, we include an implied test of market efficiency as well as those for the “relevance” of taxes and the existence of tax based dividend clienteles.     

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.     

Limit Order Adjustment Mechanisms and Ex-Dividend Day Stock Price Behavior

Unlike the NYSE, the Toronto Stock Exchange (TSX) does not adjust prices in the outstanding limit orders on ex-dividend days. We find that TSX ex-day stock price behavior differs from that on the NYSE in several key aspects. In each case, the TSX ex-day behavior is consistent with the lack of a limit order adjustment mechanism. Our findings confirm that market microstructure is an important factor that contributes to the observed Canadian ex-day price behavior. Our findings also resolve the puzzle of the relatively small ex-day price drop in Canada.     

Tax Reform and Ex-Dividend Day Behavior

This paper investigates the effect of a major Canadian tax reform on the ex-dividend day behavior of companies on the Toronto Stock Exchange. The results are inconsistent with the hypothesis that price changes on ex-dividend days reflect the relative taxation of dividends and capital gains for the “representative” investor, but are consistent with the hypothesis that ex-dividend day price behavior reflects short-term trading activities.     

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.     

Options,Taxes, and Ex-Dividend Day Behavior

A novel way of estimating the expected as opposed to the actual share price fall-off is developed using option prices. This method is applied to the UK Traded Options Market using data from 1979 to 1984. The results show that: (a) the average expected fall-off implicit in option prices is around 55 to 60% of the dividend and significantly different from it. The fall-off also varied inversely with the dividend yield, which is consistent with the prediction of the “tax clientele hypothesis.” (b) The estimates of the expected fall-off were not significantly different from the actual fall-off. (c) Finally, the results imply that the usual assumption made in valuing options on dividend-paying stocks, that the fall-off is equal to the dividend, would lead to downward-biased estimates of the option value.     

The Effect of Cum- to Ex-Dividend Changes on UK Share Prices

The price behaviour of a share at the time of its going ex-dividend presents an intriguing observable. Previous authors have argued that the statistic is indicative of ‘shareholder rationality’. This is to say, if shareholders ‘rationally' capitalise their dividends received on an after personal tax basis, the change in the price of a share on its going ex-dividend should be a well-defined function of shareholders’ assessment of their own personal tax brackets. In turn this would substantiate the ‘clientele effect’ hypothesis whereby shareholders with high income/low capital gain tax brackets hold shares with high growth companies, and shareholders with low income/high capital gain tax brackets hold shares with low-growth companies. Our statistical analysis provides evidence of the clientele effect in the UK stock market.     

An Examination of Ex-Dividend Day Stock Price Movements: The Case of Nontaxable Master Limited Partnership Distributions

This study examines the unit (stock) price and volume behavior of master limited partnerships (MLP) around the ex-dividend day. Since the dividends of MLPs are not taxable to the unitholder, tax based hypotheses predict no abnormal unit movements around the ex-day. Significant positive excess returns and volume are found before the ex-dividend day, and significant negative excess returns are found on the ex-dividend day. The findings which are not significantly impacted by the Tax Reform Act of 1986 suggest ex-day stock movements are not solely a function of investor marginal tax rates or corporate trading behavior.     

The Behavior of Stock Prices Around Institutional Trades

All trades executed by 37 large investment management firms from July 1986 to December 1988 are used to study the price impact and execution cost of the entire sequence (“package”) of trades that we interpret as an order. We find that market impact and trading cost are related to firm capitalization, relative package size, and, most importantly, to the identity of the management firm behind the trade. Money managers with high demands for immediacy tend to be associated with larger market impact.     

Payout Policy Tax Clienteles,Ex‐dividend Day Stock Prices and Trading Behavior in Germany: The Case of the 2001 Tax Reform

This paper examines the impact of the German 2001 tax reform, where Germany switched from a full imputation system to a classical system. Theory suggests that both price drop ratios and trading volume decrease following the reform. We document a significant reduction in the valuation of net dividends–in particular for high dividend yield stocks–and weakening payout policy tax clienteles. Ex‐dividend day returns are likely to be driven by short‐term traders. Though the reform removed incentives for cross‐border dividend stripping and reduced tax heterogeneity among investors, we show that the high trading volume around ex‐dividend days persists.     

The Effect of Options on Stock Prices: 1973 to 1995

I show that the effect of option introductions on underlying stock prices is best described by a two-regime switching means model whose optimal switch date occurs in 1981. In accordance with previous studies, I find positive abnormal returns for options listed during 1973 to 1980. By contrast, I find negative abnormal returns for options listed in 1981 and later. Possible causes for this switch include the introduction of index options in 1982, the implementation of regulatory changes in 1981, and the possibility that options expedite the dissemination of negative information.     

Why Option Prices Lag Stock Prices: A Trading-based Explanation

While many studies find that option prices lead stock prices, Stephan and Whaley (1990) find that stocks lead options. We find no evidence that options, even deep out-of-the-money options, lead stocks. After confirming Stephan and Whaley's results, we show their results can be explained as spurious leads induced by infrequent trading of options. We show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices. Hence, we find no evidence of arbitrage opportunities associated with the stock lead.     

融券对我国股票价格的影响

本文通过测量我国股票价格在实行融券前后的显著变化,并比较回报率横截面分布特征的变化来检验两种理论假说:1)融券使股价降低;2)投资者意见分歧加大会导致股价更大程度下跌。研究结果支持这些假说,并表明我国股市投资者预期到了融券对股价的负面影响,股价在融券宣告日前后就开始向下调整。对融券余量数据的分析显示,融券活动在起初并不活跃,导致股价在此期间下跌的主要原因是市场对融券预期的负面信息效应。     

The Effect of Dividend Changes on Stock and Bond Prices

This study examines stock and bond price reactions to dividend changes. The positive stock market response to dividend increases has several potential explanations, two of the more commonly discussed being information content and wealth redistribution between stockholders and bondholders. The evidence presented supports the wealth redistribution hypothesis but does not rule out the information content hypothesis. Typically we find that the bond price reaction to announcements of large dividend changes is opposite to the stock price reaction. Our results differ from those of Handjinicolaou and Kalay.