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Investigation of the costly-arbitrage model of price formation around the ex-dividend day in Norway

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  • Dai, Qinglei
  • Rydqvist, Kristian

Abstract

We estimate the costly-arbitrage model of Boyd and Jagannathan [Boyd, John, and Jagannathan, Ravi, 1994, Ex-Dividend Price Behavior of Common Stocks, Review of Financial Studies 7, 711-741.] using Norwegian stock market data. Taxable distributions take place at two separate dates, one that entails the distribution of an imputation-tax credit and another the distribution of the cash dividend. We find that the costly-arbitrage model is consistent with observed stock returns around the ex-dividend day, but the model cannot explain the return patterns around the distribution of the tax credit. We conclude that uncertainty about the cash flows prevents arbitrage.

Suggested Citation

  • Dai, Qinglei & Rydqvist, Kristian, 2009. "Investigation of the costly-arbitrage model of price formation around the ex-dividend day in Norway," Journal of Empirical Finance, Elsevier, vol. 16(4), pages 582-596, September.
    • Handle: RePEc:eee:empfin:v:16:y:2009:i:4:p:582-596
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