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Tax reform and the identity of marginal traders around ex-dividend days

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  • Tseng, Yun-lan
  • Hu, Shing-yang

Abstract

In 1998, Taiwan changed the computation of dividend income for domestic investors. This tax reform offers a natural experiment to explore the relation between taxes and investor behavior around ex-dividend days. We find that the 1998 tax reform reduces the ex-date return and changes the identity of marginal traders on the ex-dividend day. While large and small individual investors functioned as marginal traders before the reform, large individual investors and foreign investors play the role after the reform. We also find that all types of domestic investors engage in arbitrage around ex-dividend days prior to the tax reform, whereas following the tax reform, domestic investors and foreigners act as short-term arbitrageurs surrounding the ex-date. Overall, our findings strongly support the dynamic dividend clientele theories.

Suggested Citation

  • Tseng, Yun-lan & Hu, Shing-yang, 2013. "Tax reform and the identity of marginal traders around ex-dividend days," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 181-199.
    • Handle: RePEc:eee:pacfin:v:25:y:2013:i:c:p:181-199
    DOI: 10.1016/j.pacfin.2013.08.009
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    2. Cannavan, Damien & Gray, Stephen, 2017. "Dividend drop-off estimates of the value of dividend imputation tax credits," Pacific-Basin Finance Journal, Elsevier, vol. 46(PB), pages 213-226.

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    More about this item

    Keywords

    Ex-dividend day; Tax reform; Marginal trader; Arbitrage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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