Trading volume with private valuation: evidence from the ex-dividend day

We test a theory of the interaction between investors' heterogeneity,risk, transaction costs, and trading volume. We take advantageof the specific nature of trading motives around the distributionof cash dividends, namely the costly trading of tax shields.Consistent with the theory, we show that when trades occur becauseof differential valuation of cash flows, an increase in riskor transaction costs reduces volume. We also show that the nonsystematicrisk plays a significant role in determining the volume of trade.Finally, we demonstrate that trading volume is positively relatedto the degree of heterogeneity and the incentives of the variousgroups to engage in trading.