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Ex day effects of the 2003 dividend tax cut

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  • Bali, Rakesh
  • Francis, Jack Clark

Abstract

We analyze ex day dynamics around the May 2003 dividend tax cut in a framework with arbitrageurs as liquidity providers. Raw returns and ratios for all groups don't change significantly around the event but the volatilities decline significantly. The volume declines more (less) strongly for high (low) yields. This is consistent with the reduction in the differential tax rates leading to a reduced demand for capital losses around the ex day, and a reduction in informed trading. The price dynamics for the one week before and after periods also support a market microstructure explanation. Evidence on market quality is mixed.

Suggested Citation

  • Bali, Rakesh & Francis, Jack Clark, 2016. "Ex day effects of the 2003 dividend tax cut," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 11-22.
    • Handle: RePEc:eee:reveco:v:41:y:2016:i:c:p:11-22
    DOI: 10.1016/j.iref.2015.09.007
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    More about this item

    Keywords

    Ex day; Tax clienteles; Transaction costs; Price discreteness; Bid-ask prices;
    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
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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