ex day behavior with dividend preference and limitations to short term arbitrage the case of swedish lottery bonds abstract swedish lottery bonds offer a unique opportunity to study ex day effects in an environment where cash distributions are tax advantaged relative to capital gains thus in the lottery bond market we observe a reversal of the preference for capital gains that researchers have cited as an explanation for the ex day behavior of u s equities further in this market there are barriers to short term arbitrage when prices do reflect the tax preferences of individual investors we find the bonds are priced around the ex day to reflect differential tax rates on income and capital gains consistent with the prevailing tax regimes the bonds consistently experience negative returns over the coupon payment period and in fact often sell at negative yields prior to the cash distribution as one would expect given tax motivated trading between high tax investors who buy prior to the distribution and low tax investors who buy after the distribution

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 previous studies have documented that the risk adjusted abnormal returns on the ex dividend dates are positive and significantly related to the dividend yield the interpretation of these findings is however controversial the question relates to what category of investors sets ex day prices elton and

new evidence of the impact of dividend taxation and on the identity of the marginal investor this paper examines the impact of a major change in dividend taxation introduced in the united kingdom in july 1997 the reform was structured in such a way that the immediate impact fell almost entirely on the largest investor class in the united kingdom namely pension funds we find significant changes in the valuation of dividend income after the reform in particular for high yielding companies these results provide strong support for the hypothesis that taxation affects the valua tion of companies and that pension funds were the effective marginal investors for high yielding companies

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

minimum price variations discrete bid ask spreads and quotation sizes exchange minimum price variation regulations create discrete bid ask spreads if the minimum quotable spread exceeds the spread that otherwise would be quoted spreads will be wide and the number of shares offered at the bid and ask may be large a cross sectional discrete spread model is estimated by using intraday stock quotation spread frequencies the results are used to project 1 16 spread usage frequencies given a 1 16 tick projected changes in quotation sizes and in trade volumes are obtained from regression models for stocks priced under 10 the models predict spreads would decrease 38 percent quotation sizes would decrease 16 percent and daily volume would increase 34 percent article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

taxes on tax exempt bonds implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates with implicit tax rates close to 100 using retail trades and above 70 for interdealer trades these implied tax rates can be identified because a portion of secondary market municipal bond trades involves income taxes after valuing the tax payments market discount bonds which carry income tax liabilities trade at yields around 25 basis points higher than com parable municipal bonds not subject to any taxes the high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions the issue of how taxes affect asset prices is an important issue in finance accounting and economics in theoretical models examining the effect of taxes

the strategic bequest motive although recent research suggests that intergenerational transfers play an important role in aggregate capital accumulation our understanding of bequest motives remains incomplete we develop a simple model of strategic bequests in which a testator influences the decisions of his beneficiaries by holding wealth in bequeathable forms and by conditioning the division of bequests on the beneficiaries actions the model generates falsifiable empirical predictions that are inconsistent with other theories of intergenerational transfers we present econometric and other evidence that strongly suggests that bequests are often used as compensation for services rendered by beneficiaries

taxes and dividends the uk evidence abstract 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

does the specialist matter differential execution costs and intersecurity subsidization on the new york stock exchange this article tests for differences in execution costs among specialist firms for new york stock exchange listed securities execution cost differences provide a measure of the relative performance of specialist firms we find a substantial difference in effective spreads and order processing costs across specialist firms controlling for stock characteristics while economically significant the differences in execution costs between specialist firms are much smaller than the cross market differences reported by huang and stoll 1996 within a specialist firm there is a positive relation between order processing costs and trading activity that is consistent with the hypothesis that active stocks subsidize inactive stocks this article investigates whether differential execution costs exist across new york stock exchange nyse specialist firms and among stocks traded by the same specialist firm execution costs are paid by investors when completing a trade and are separate from the commission costs paid to a broker execution costs arise from the bid ask spread and the price impact of an investor s order on the future bid ask quote stoll 1985 shows that a transactionally efficient financial market which minimizes execution costs also minimizes the deviation in transaction prices from the true price of the underlying security evidence of differential execution costs for similar securities can be used to identify high cost and low cost liquidity providers on the nyse furthermore differential execution costs among stocks traded by the same specialist firm provide evidence consistent with a subsidy from actively traded to inactively traded stocks

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 copyright the american finance association 2000

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

new evidence that taxes affect the valuation of dividends this paper uses british data to examine the effects of dividend taxes on investors relative valuation of dividends and capital gains british data offer great potential to illuminate the dividends and taxes question since there have been two radical changes and several minor reforms in british dividend tax policy during the last 30 years studying the relationship between dividends and stock price movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors valuation of dividends using daily data on a small sample of firms and monthly data on a much broader sample we find clear evidence that taxes affect the equilibrium relationship between dividend yields and market returns these findings suggest that taxes are important determinants of security market equilibrium and deepen the puzzle of why firms pay dividends financial economists have long been puzzled by corporate dividend behavior many individual investors should value a dollar of corporate dividends less than a dollar of corporate retentions because the former gives rise to greater tax liabilities corporations however face equal costs of paying out dividends and retaining earnings miller and modigliani 31 demonstrated that in the absence of taxes dividend policy should have no effect on share valuation if dividends are tax penalized however a value maximizing firm should pay no dividends widespread dividend payments to taxable investors are therefore surprising in 1981 dividend tax revenues in the united states were estimated to exceed 20 billion dollars indeed some have interpreted the large volume of dividends paid as evidence against the rational behavior postulates typically used by economists the dividend question has stimulated a large theoretical and empirical literature concerned with the qluestion of investors valuation of dividends in particular the question of how taxes affect the market valuation of dividends has generated considerable controversy numerous studies including auerbach 2 litzenberger and ramaswamy 24 26 morgan 34 and rosenberg and marathe

equity markets and personal taxation the ex dividend day behaviour of finnish stock prices abstract this paper analyzes the ex dividend day behaviour of stock prices in the finnish stock market the tax structure in finland is strikingly similar to the new tax structure in the u s which was for the first time in effect during the fiscal year 1987 the results in this paper may thus also illuminate the ex dividend day behaviour in the u s stock markets under the new tax law our empirical data show that the average drop in the stock prices on their ex dividend days has been 90 of the amount of the dividend during the years of 1974 to 1985 this is shown to be consistent with the tax explanation taking into account the finnish tax laws it is especially shown that the marginal seller on the ex dividend days is an individual investor with a marginal tax rate of approximately 50

paying for market quality many financial markets including electronic limit order markets assign designated liquidity providers lps we study the experience of the stockholm stock exchange where listed firms contract directly with lps our analysis offers insights regarding situations where designated liquidity provision may be beneficial in addition we consider the form of liquidity provision contracts including affirmative obligations required of the lp and compensation for lp services we find that low current trading activity wide spreads and higher information asymmetry increase the attractiveness of contracted liquidity provision the evidence indicates that lps trade against market movements and in times of wide spreads on balance firms contracting with lps experience a decreased cost of capital and significant improvements in market quality and price discovery

the value of dividend imputation tax credits in australia abstract a dividend imputation tax system provides shareholders with a credit for corporate tax paid that can be used to offset personal tax on dividend income this paper shows how to infer the value of imputation tax credits from the prices of derivative securities that are unique to australian retail markets we also test whether a tax law amendment that was designed to prevent the trading of imputation credits affected their economic value before the amendment tax credits were worth up to 50 of face value in large high yielding companies but subsequently it is difficult to detect any value at all

portfolio rebalancing and the effective taxation of dividends and capital gains following the tax reform act of 1986 abstract the tax reform act tra of 1986 among other things equalized the nominal taxation of dividend and capital gains income the evidence is consistent with the hypothesis that ordinary investors rebalanced their portfolio holdings in response to the new taxes such rebalancing appears to have concentrated on liquid stocks indicating that transaction costs are an important consideration for ordinary investors involved in restructuring their portfolio holdings the tax clientele relationships that existed prior to the new act were distorted temporarily but have reappeared by 1988 interestingly investors post reform effective tax rates still give a preference to capital gains as they did prior to the tax reform

regulation capital and the evolution of organizational form in us life insurance this paper studies the association between regulation and the organizational form of new life insurers between 1900 and 1949 the mutual form was popular in states with low initial capital requirements for mutual companies and differentially higher requirements for stock companies but was rarely used elsewhere this suggests that entrepreneurs took a path of least resistance when choosing organizational form and that the mutual s disadvantage in raising capital contributed to its decline a decline that accelerated as states raised requirements and eliminated the aforementioned differentials contrary to previous analysis the paper finds little evidence connecting other regulations to mutual decline jel g21 l51 n21 n22

dividends and taxes evidence on tax reduction strategies this article investigates two aspects of dividend tax avoidance not addressed by prior research first it examines the aggregate dividend tax savings provided to individuals through tax exempt and tax deferred accumulators using the internal revenue service individual income tax model it then proceeds to determine whether specific provisions of the internal revenue code such as the preferential treatment of capital gains the investment interest limitation and the 100 dividend exclusion affect the individual s choice of investment income finally it provides a direct estimate of the average marginal tax rate on dividends that takes into account tax favored accumulators copyright 1990 by the university of chicago

the ex dividend day behavior of stock prices a re examination of the clientele effect a comment in a recent article in this journal kalay 5 has written an extensive comment on our 1970 article 2 concerning marginal stockholder tax rates and the clientele effect while we are flattered that our article is viewed of sufficient importance to gain this attention 12 years after it was written we do have reservations about kalay s comments we are principally concerned with his interpretations of relevant transaction costs and the role they play in setting equilibrium

the ex dividend day behavior of stock prices the case of japan we provide a comprehensive empirical analysis of stock price behavior around the ex dividend day in japan we find that prices rise on the ex day and that dividend related tax effects appear to be secondary returns around ex dividend days are dominated by the proximity of many ex days to the fiscal year end excess returns of 1 percent which are independent of any dividend related considerations are higher than round trip transaction costs on medium sized transactions prices seem to imply selling pressure before and buying pressure at the start of the new fiscal year these trading patterns appear to be motivated by intercorporate manipulative trading around the end of the firms fiscal year which are unrelated to dividends article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

ex dividend returns the mexican puzzle abstract we study ex dividend returns in mexico where an imputation system entitles individual investors to a net dividend tax credit based on taxation we expect ex day abnormal returns to be negative or at most zero in mexico however they are significantly positive because ex day returns are positive even for stocks restricted to mexican nationals they are not attributable to foreign stockholders tax considerations none of the market microstructure based hypothesis in the literature can explain these positive ex day returns ex day returns in mexico are a puzzle

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 the role of short term traders in financial markets is a matter of considerable controversy the debate on this issue has heightened in the wake of the recent asian currency crisis which some governments blamed on the activities of short term traders critics contend that short term traders engage in speculation leading to excessive and debilitating volatility in market prices others argue that short term traders perform a useful role by increasing valuable liquidity berkman and eleswarapu 1998 report that regulatory changes on the bombay stock exchange curbing short term trading had a measurably adverse impact on asset values supporters of short term traders also argue that these traders make a key contribution to the efficiency of financial markets by constantly scouring the markets for arbitrage opportunities this study examines the impact of the

market valuation of tax timing options evidence from capital gains distributions we examine a distribution that is taxed as a capital gain rather than as a dividend since the distribution induces a realized capital gain while the price change is an unrealized gain ex day return behavior provides evidence of the value of tax timing capital gains we show that investors are compensated 7c in unrealized gains for each dollar of realized capital gains that is 1 of realized capital gains is equivalent to 93c of unrealized gains an investor with a tax rate on realized gains of 15 has an effective tax rate on unrealized capital gains of 8 6 capital gains taxes can be deferred until assets are sold this feature provides the investor who purchases a security with an option regarding the timing of the realization of capital gains and losses this option can be used to lower one s expected tax liability even if capital gains tax rates remain constant for different holding periods an investor who delays the realization of a gain effectively enjoys compound returns on the postponed taxes if capital losses are tax deductible or partially tax deductible tax timing is even more valuable since investors can follow the strategy of selling stocks with capital losses early while postponing the sale of winners recent evidence lends support to the contention that some investors respond to this tax timing option for example odean 1998 shows that u s investors are more likely to sell losers in december than other months similarly grinblatt and keloharju 2002 show that at the end of the tax year finnish investors are more likely to realize losses than gains this type of tax motivated trade seems to affect market returns as shown by poterba and weisbenner 2001 who demonstrate that end of year tax loss selling is related to return variation in the month of january

liquidity provision and the organizational form of nyse specialist firms we examine the influence of nyse specialist firm organizational form on the nature of liquidity provision we compare closely held firms whose specialists provide liquidity with their own capital to widely held firms whose specialists provide liquidity with diffusely owned capital we argue that specialists using their own capital have a greater incentive and ability to reduce adverse selection costs but face a greater cost of capital differences in the proportion of spreads due to adverse selection costs large trade frequency the sensitivity between depth and spreads and price stabilization support this argument recent studies by cao choe and hatheway 1997 and corwin 1999a document differences across specialist firms in execution costs trading halts due to order imbalances and market stabilization why these differences in liquidity provision exist however is not well understood we argue that differences in liquidity provision arise from differences in specialist firm organizational form firms that make markets with capital supplied by their specialists owner specialist firms offer economies with respect to asymmetric information costs while firms that make markets with diffusely owned capital employee specialist firms offer economies with respect to capital costs our empirical results support this argument since march 1997 the nyse has allowed listing firms to choose which specialist firm handles their stock from a pool provided by the nyse allocations committee new york stock exchange 1997 like the choice of debt dividend or compensation policies the choice of a specialist firm po

foreign and domestic investors and tax induced ex dividend day trading abstract this paper reports evidence on the consequences of differential tax treatment for domestic and foreign owners in a market with a high degree of foreign ownership for certain stocks the helsinki stock exchange hse we find that ex dividend day ratios vary with the degree of foreign ownership and detect significantly abnormal ex dividend day trading volumes the average ex dividend price drops for high yield high foreign ownership stocks are likely to lie outside no arbitrage boundaries for domestic taxable investors an investigation of short selling through a derivatives instrument also reveals significant excess trading volumes in ex dividend months the tax heterogeneity of the company s ownership structure seems to play a role in explaining deviations from dividend neutrality more deviations are observed for companies with a more homogeneous ownership structure in terms of taxation

stock market structure and volatility the procedure for opening stocks on the nyse appears to affect price volatility an analytical framework for assessing the magnitude of the structurally induced volatility is presented the ratio of variance of open to open returns to closeto close returns is shown to be consistently greater than one for nyse common stocks during the period 1982 through 1986 tbe greater volatility at the open is not attributable to the way in which public information is released since both the opento open return and the close to close return span the same period of time instead the greater volatility appears to be attributable to private information revealed in trading and to temporaryprice deviations induced by specialist and other traders the implied cost of immediacy at the open is significantly higher than at the close other empirical evidence in this article documents the volume of trading at the open the time delays between the exchange opening and the first transaction in a stock the difference in daytime volatility versus overnight volatility and the extent to which volatility is related to trading volume

why do stock prices drop by less than the value of the dividend evidence from a country without taxes abstract it is well documented that stock prices on ex dividend days drop by less than the value of the dividend on average this has commonly been attributed to the effect of tax clienteles we examine data from the hong kong stock market where neither dividends nor capital gains are taxed as in the u s the average stock price drop is less than the value of the dividend specifically the average dividend for the period 1980 1993 is hk 0 12 and the average price drop is hk 0 06 we are able to account for this both theoretically and empirically through market microstructure arguments

new evidence on the impact of tax loss selling on the turn of the year effect abstract the turn of the year effect is an empirical regularity which refers to the observation that equity returns on days around the turn of the calendar year are significantly high a common explanation for the effect is the tax loss selling hypothesis three studies have tested this hypothesis by examining equity returns before and after the introduction of the war revenue act of 1917 however these studies have reached inconsistent conclusions following these inconsistent findings this paper examines whether the previous findings are robust to the extension of the pre tax period or whether the previous findings are robust to the use of daily data in contrast to the evidence from existing research which has used daily data a significant turn of the year effect is found prior to 1917 furthermore this effect is shown to be independent of other empirical regularities such as the turn of the month effect and the holiday effect and seasonality in dividend payments cannot explain the finding thus we conclude that the tax loss selling hypothesis cannot offer a complete explanation of the turn of the year effect

marginal stockholder tax effects and ex dividend day price behavior evidence from taxable versus nontaxable closed end funds almost all research on the movement of stock prices on ex dividend days has found that prices decline by less than the dividend though this is consistent with tax effects several papers have argued that this phenomenon could be caused by market microstructure effects in this paper we make use of a natural experiment that provides support for the tax explanations of ex dividend behavior some closed end funds have taxable and some have nontaxable dividend distributions both types are subject to taxes on capital gains the implication of this for ex dividendday price behavior is very different between these two types of funds if taxes matter this paper demonstrates that the direction of ex dividendday price behavior is consistent with a tax explanation and that ex dividend day price behavior changes as theory would suggest with changes in the tax law

ex date stock price adjustment to stock dividends a note many recipients of stock dividends look upon them as distributions of corporate earnings and usually in an amount equivalent to the fair value of the additional shares received furthermore it is to be presumed that such views of recipients are materially strengthened in those instances which are by far the most numerous where the issuances are so small in comparison with the shares previously outstanding that they do not have any apparent effect upon the share market price and consequently the market value of the shares previously held remains substantially unchanged

tax induced trading of equity securities evidence from the adr market we examine ex dividend date trading of american depositary receipts adrs using a sample of 1 043 dividends over the period 1988 to 1995 adr dividends are often subject to foreign withholding taxes creating incentives for certain investors to avoid the distribution adrs exhibit negative abnormal ex dividend day returns and their prices behave consistently with their related withholding taxes abnormal trading volume for taxable issues exceeds 130 percent and 300 percent of normal volume on the cum and ex dates respectively abnormal volume is an increasing function of foreign withholding tax rates and decreasing function of transactions costs this abnormal exdate trading activity is consistent with tax motivated trading this paper provides empirical evidence from a sample of american depositary receipts adrs that foreign taxes on dividend income are positively associated with abnormal ex dividend day trading activity researchers have long been interested in the question of whether taxes affect investor behavior around ex dividend days such work has implications for corporate financial and distribution policies and for government tax policies adrs provide a unique setting in which to examine the effects of taxes on investor trading behavior because of the unique features of the foreign withholding taxes that apply to them a number of studies have attempted to isolate the determinants of ex dividend day pricing and trading activity of u s equities and there is considerable evidence of tax induced investor behavior around the ex dividend day for common

why do companies pay dividends this paper presents a simple model of market equilibrium to explain why firms that maximize the value of their shares pay dividends even though the funds could instead be retained and subsequently distributed to shareholders in a way that would allow them to be taxed more favorably as capital gains the two principal ingredients of our explanation are 1 the conflicting preferences of shareholders in different tax brackets and 2 the shareholders desire for portfolio diversification we show that companies will pay a positive fraction of earnings in dividends we also provide some comparative static analysis of dividend behavior with respect to tax parameters and to the conditions determining the riskiness of the securities this abstract was borrowed from another version of this item

in search of liquidity block trades in the upstairs and downstairs markets we analyze the ability of various market mechanisms to provide liquidity for large equity trades using data on 21 077 block transactions in dow jones stocks we find that the down stairs nyse floor market is a significant source of liquidity although negotiation in the informal upstairs market provides better execution than the downstairs market for large trades these differences are economically small we find however that upstairs markets are used by traders who can credibly signal that their trades are liquidity motivated thus upstairs markets allow trades that may not otherwise occur article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

transactions volume and volatility we show that the positive volatility volume relation documented by numerous researchers actually reflects the positive relation between volatility and the number of transactions thus it is the occurrence of transactions per se and not their size that generates volatility trade size has no information beyond that contained in the frequency of transactions our results suggest that theoretical research needs to entertain scenarios in which 1 both the frequency and size of trades are endogenously determined yet 2 the size of trades has no information content beyond that contained in the number of transactions article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

competitive behavior and nonfinancial objectives entry exit and pricing decisions in closely held firms because of the predominance of the assumption of profit maximization as the goal of the firm and its decision makers especially in the competitive strategy literature research has yet to investigate how differences in objectives might influence competitive actions such as entry exit and pricing decisions this represents an important gap in the literature given the fundamental role of objectives in decision making and widespread evidence that many firms especially those that are closely held are motivated by nonfinancial objectives in addition to an interest in financial returns to further our understanding of firms competitive strategy decisions we discuss how the presence of nonfinancial objectives in closely held firms leads to a weakening of the relationship between economic indications of profitability and competitive behaviors using a unique data set of nearly 4 000 closely held and non closely held establishments engaged in local competition in the texas hotel industry we find that the e

the market valuation of cash dividends abstract this paper re examines the case of citizens utilities a firm with one class of common stock which pays stock dividends and one which pays taxable cash dividends john long s 1978 study of the two shares relative prices suggests that investors may prefer cash dividends to equal sized stock dividends this paper finds that the cash dividend share s ex day price decline is less than their dividend payment stock dividend shares fall by nearly their full dividend the disparity between ex day dividend valuation and the observed prices of the two shares is inconsistent with some explanations of the demand for cash dividends

ex dividend day stock price behavior discreteness or tax induced clienteles abstract since prices are constrained to discrete tick multiples while dividends are essentially continuous ex day price changes will not equal dividends we argue that the expected price drop is strictly less than the dividend but within one tick of the dividend the price drop to dividend ratio will i be less than one ii increase with dividends generally and iii decline between tick multiples giving a sawtooth pattern in the data since dividends and dividend yields are highly correlated discreteness will give the impression of tax induced dividend clienteles even if there are none taxable cash dividends and nontaxable stock dividends exhibit similar ex day behavior

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

tax induced trading around ex dividend days abstract this paper investigates trading volume around ex dividend days for taxable distributions cash dividends it is found that trading volume increases significantly around the ex dividend day this increase is more pronounced for high yield actively traded stocks and after brokerage commissions became negotiable the results are consistent with the hypothesis that short term traders have an impact on ex day price behavior at least for taxable distributions for non taxable distributions stock splits and stock dividends we find negative abnormal volume around ex day

savings of the elderly and desired bequests cross section data often show that the wealth of the elderly increases with age even at advanced ages these and other results suggest that the life cycle hypothesis of consumption should be augmented to include a bequest motive for saving in this paper the author proposes a model of bequests and a test for a bequ est motive using panel data he finds that over a ten year period the elderly in the data set dissaved in contradiction to most cross section results the test offers no support for a bequest motive copyright 1987 by american economic association

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

the effect of tax heterogeneity on prices and volume around the ex dividend day evidence from the milan stock exchange to investigate the effect of taxation on stock price and trading volume around the ex dividend day we use the italian stock market where dividends on two classes of stock are taxed differently we find that the weighted average of investors tax rates is reflected in the ex day prices and the variance of the relative tax rate across investors is reflected in the volume of trades we also show that higher transaction costs result in higher ex dividend day excess returns and lower abnormal volume this finding is consistent with profit elimination activity by institutions and corporations article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

tick size nyse rule 118 and ex dividend day stock price behavior abstract bali and hite 1998 and dubofsky 1992 propose models in which market microstructure effects play a role in the ex dividend day price drop anomaly bali and hite suggest that the anomaly is caused solely by price discreteness while dubofsky suggests that nyse rule 118 is also involved we test these models by examining cum to ex day price drops during the one eighth one sixteenth and decimal tick size regimes while the evidence is qualitatively consistent with dubofsky s predictions neither model is satisfactory in a quantitative sense one of our main empirical findings is that no significant decline was evident in the magnitude of the ex day anomaly after the tick size reduction

dividend taxation in firm valuation new evidence in this paper we develop a residual income model showing how taxes on dividends affect the relative valuation of retained earnings versus contributed equity as well as the value of expected future earnings tests of predictions from our model for a sample of compustat firms from 197594 suggest that overall firm value and the relative valuation weights investors assign to retained earnings contributed equity and current earnings all critically depend on dividend taxes the findings also suggest that investors take a proprietary perspective in valuation and impute an unrecorded shareholder level tax liability on retained earnings the u s tax system subjects retained earnings to dividend taxes upon distribution to shareholders while contributed equity is returned to shareholders as a nontaxable return of capital from the shareholder s proprietary perspective therefore retained earnings should be valued on

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 capturers active our theory predicts that such mixing will result in a nonlinear relation between percentage price drop and dividend yield not the commonly assumed linear relation this prediction and another important prediction of theory are supported empirically in a variety of tests marginal price drop is not significantly different from the dividend amount thus over the last several decades one for one marginal price drop has been an excellent average rule of thumb article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a simple examination of the empirical relationship between dividend yields and deviations from the capm abstract several papers have been published in recent years dealing with both the theoretical and the empirical impact of dividend yields on security returns dividends have been postulated as affecting stock returns because of tax effects agency costs and the wealth transfer hypothesis in this paper we perform a purely empirical examination of whether and to what extent deviations from the zero beta form of the capm are explained by divident yields the paper demonstrates that dividend yield has a large and statistically significant impact on return above and beyond that explained by the zero beta form of the capm this is consistent with the findings of litzenberger and ramaswamy in addition our results are consistent with the findings of small firm effects

are seasonal anomalies real a ninety year perspective in recent years there has been a proliferation of empirical studies documenting unexpected or anomalous regularities in security rates of return in addition to the widely studied relation between firm size and rate of return 1 these include seasonal regularities related to the time of the day harris 1986 the day of the week see ball and bowers 1986 cross 1973 french 1980 gibbons and hess 1981 jaffe and westerfield 1985 keim and stambaugh 1984 and lakonishok and levi 1982 the time of the month ariel 1987 and the turn of the year see haugen and lakonishok 1988 jones pearce and wilson 1987 lakonishok

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 elton and gruber s 1970 findings that in 1966 67 stock prices fell on average by less than the amount of the dividend on the ex dividend date and that the ratio of the price decrease to the dividend was correlated with the dividend yield have led to the development of a tax clientele hypothesis relating to investor behavior one puzzling result from their study was the finding that the price decreases for the highest yielding securities were significantly greater than the dividends which in their analysis implied an investor clientele with negative tax rates while michaely 1989 using 1986 87 data was unable to find support for the tax clientele hypothesis across different yield groups he also documented the large price drop for the highest yielding securities michaely 1989 suggested that his results may demonstrate a preference of corporations for dividend over capital gains because of favorable tax treatment corporations receive on dividend income corporate trader hypothesis shefrin and statman 1984 however suggest that preferences for dividends over capital gains may exist for nontax reasons such as self control or a desire to segregate gains and losses the purpose of this paper is to examine the ex dividend day stock price behavior of master limited partnership mlp units during the 1985 88 period dividends from these high yielding securities are not taxable therefore support for either the tax clientele hypothesis or the corporate trader hypothesis would be found only if the average ex day price change on mlps equalled the dividend this result would also be consistent with barclay s 1987 finding that before the enactment of an income tax in 1913 even high

dividend capture in nasdaq stocks abstract we examine the importance of dividend capture trading in nasdaq stocks by testing for cross sectional relations between ex day abnormal returns and bid ask spreads throughout we find that ex day returns and spreads are positively related the relation increases across dividend yield quintiles and is strongest in high yield stocks the relation does not appear in a sample of non ex dividend days these findings indicate that dividend capture trading affects the ex day returns of at least some particularly high yield nasdaq stocks and that dividend capture trading is important for understanding ex dividend day returns

evidence on wealth age profiles in canadian cross section data this paper reports on one component of a research program in which we are studying household behaviour to establish a set of empirical facts upon which researchers can construct more realistic models evidence on whether wealth age profiles conform to the inverse u shape predicted by the standard life cycle model is mixed here we show that there are significant differences in accumulation behaviour across major household types on average blue collar households decumulate after retirement but white collar do not la relation entre la richesse et l dge profils dr en moyenne les menages de cols bleus font l experience d une decumulation de richesse apres la retraite alors que les menages de cols blancs ne font pas cette experience

the cost of annuities implications for saving behavior and bequests the fact that most elderly u s individuals maintain a flat age wealth profile rather than buy individual life annuities contradicts the standard life cycle consumption model average expected yields on individual life annuities in the united states during 1968 1983 were lower by 4 21 6 13 percent or 2 43 4 35 percent after allowing for adverse selection than yields on plausible alternative investments simulations of a model of saving and portfolio allocation show that during the early retirement years such yield differentials can account for the absence of annuity purchases even without a bequest motive at older ages the combination of such yield differentials and a bequest motive can do so it is common experience that as we grow older and nearer to eternity we become more not less anxious about money derek brewer chaucer and his world p 213

precautionary saving and accidental bequests this paper presents a simple general equilibrium model of precautionary saving and accidental bequests this model is used to analyze the implications of individual lifetime uncertainty for aggregate consumption and capital accumulation a precautionary demand for saving arises because an individual consumer does not know in advance the date at which he will die and he wants to avoid low levels of consumption in the event that he lives longer than expected an implication of this precautionary saving is that when death does occur the consumer is generally holding some wealth which is then passed on to his heirs in the form of an accidental bequest even if all consumers have the same ex ante mortality probabilities there will be some intracohort variation in the date of death consequently there will be a nondegenerate distribution of bequests left by consumers in a cohort this nondegenerate distribution of bequests left by one generation induces variation in the distributions of wealth consumption and bequests of subsequent generations the importance of bequests in aggregate saving has been established by laurence kotlikoff and lawrence summers 1981 who reported that 80 percent of u s household wealth is inherited wealth one interpretation of this finding is that the simple life cycle model without bequest motives is an inadequate description of saving behavior in the united states but the model i present demonstrates that accidental bequests by selfish consumers can account for a potentially sizeable fraction of aggregate wealth although some part of bequests especially by the wealthy undoubtedly results from an explicit bequest motive accidental bequests also play a role in the intergenerational transfer of wealth as well as in the intragenerational variation in wealth in order to focus on the role of accidental bequests i purposely exclude a bequest motive from the specification of the utility function the effects of lifetime uncertainty on individual consumption behavior were first examined formally in a seminal paper by menachem yaari 1965 yaari s model provided the basic framework for virtually all subsequent work on uncertain lifetimes including well known papers by nils hakansson 1969 stanley fischer 1973 robert barro and james friedman 1977 david levhari and leonard mirman 1977 and kotlikoff and avia spivak 1981 however all of these papers focused on the consumption decision of an individual and ignored the effect of accidental bequests on the behavior of the recipients of these accidental bequests 2 as will be shown at various points in this paper changes in the economic environment can have effects on aggregate behavior which differ sharply from the effects on individual behavior because of the endogenous adjustment of bequests the effects of department of economics harvard university cambridge ma 02138 this paper is a revised version of bequests and social security with uncertain lifetimes nber working paper no 1372 june 1984 i thank olivier blanchard john burbidge christopher cavanagh robert clower stanley fischer benjamin friedman elhanan helpman mervyn king nobuhiro kiyotaki laurence kotlikoff robert mcdonald james pesando julio rotemberg lawrence summers lars svensson mark watson and jeffrey wolcowitz for valuable conversations and correspondence i also thank the participants in seminars at boston university columbia university cornell university federal reserve board harvard university university of iowa mit university of minnesota university of montreal national bureau of economic research north carolina state university the wharton school and yale university and two anonymous referees for their helpful comments i also thank the national science foundation for financial support 1 in the presence of perfect annuity and life insurance markets there may or may not be bequests depending on the presence or absence of a bequest motive but there would be no accidental bequests 2 kotlikoff and spivak focus on the role of the family in providing an incomplete annuities market but stop short of a full scale overlapping generations model in which the distribution of bequests is determined endogenously

uncertain lifetime consumption and dissaving in retirement this paper asks whether the continued accumulation or mild dissaving observed among the retired can be explained by uncertain lifetime in the absence of annuities after an initial period influenced by borrowing constraints under constant relative risk aversion uncertain lifetime depresses consumption by a proportion increasing with age if the elasticity of intertemporal substitution in consumption is small illustrative computations based on actual income and survival data show that plausible elasticities are sufficiently small to give this effect the reduction in consumption is large enough to explain much of the lack of decumulation by the elderly

cross border investing with tax arbitrage the case of german dividend tax credits german dividends typically carry a tax credit which makes the dividend worth 42 86 more to a taxable german shareholder than to a tax exempt or foreign shareholder this results in a penalty for foreign investors who buy and hold german dividend paying stocks i document that as a result of the credit the ex day drop exceeds the dividend by more than one half of the tax credit and show that futures and option prices embed more than one half of the tax credit the existence of the credit creates opportunities for cross border tax arbitrage in which foreign holders of german stock transfer the dividend to german shareholders and implies that it is tax efficient for foreign investors to hold derivatives rather than investing directly in german stocks the empirical findings are consistent with costly tax arbitrage activity by german investors who face tax risk due to antiarbitrage rules since dividend tax credits exist in many other countries the findings are potentially of broad interest

personal income taxes and the january effect small firm stock returns before the war revenue act of 1917 a note this paper tests the tax explanation of the january effect by examining small firm stock returns before the war revenue act of 1917 no evidence of a turn of the year effect is found this paper also extends previous authors work on the subject to 191829 a january effect is found during that period the large abnormal returns earned by small firm stocks during the first few days of january is attracting considerable attention from financial economists specifically keim 10 shows that over the entire 1963 79 period the average difference between risk adjusted returns of small and large firms is about 0 7 per day during january even more striking is the finding of keim 9 that over the entire 1931 78 period the relation between daily abnormal returns and size is always negative and more pronounced in january than in any other month similarly ibbotson and sinquefield 8 note that the average return on the quintile of nyse stocks with the lowest market values exceeds the return on the standard and poor s corporate index for 50 of the 56 januarys from 1926 81 there is no accepted theory linking the excess returns of small firms in january with the change of the tax year nevertheless the plausibility of a relation between taxes and stock return seasonality has led roll 17 brown et al 6 berges mcconnell and schlarbaum 2 and reinganum 16 among others to investigate personal income taxes as an explanation for the january effect this paper uses a different methodology and reaches stronger conclusions than any of the above papers specifically i examine the returns of small firms for the period from 1900 to 1929 prior to the revenue act of 1917 marginal income tax rates for investors were very low or zero the major finding of this paper is that there is no evidence that small firms earned abnormal returns in january prior to the 1917 tax act i also show that a january effect does appear during the years 1918 29 therefore i cannot reject a tax explanation for the january effect

ex dividend day trading who how and why evidence from the finnish market abstract 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