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Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes

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  • Murray Frank
  • Ravi Jagannathan

Abstract

It is well documented that on average, stock prices drop by less than the value of the dividend on ex-dividend days. This has commonly been attributed to the effect of tax clienteles. We use data from the Hong Kong stock market where neither dividends nor capital gains are taxed. As in the U.S.A. the average stock price drop is less than the value of the dividend; specifically, in Hong Kong the average dividend was HK $0.12 and the average price drop was HK $0.06. We are able to account for this both theoretically and empirically through market microstructure based arguments.

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  • Murray Frank & Ravi Jagannathan, . "Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:229
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    References listed on IDEAS

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    Cited by:

    1. Sven-Olov Daunfeldt, 2007. "Tax-Induced Trading and the Identity of the Marginal Investor: Evidence from Sweden," The European Journal of Finance, Taylor & Francis Journals, vol. 13(7), pages 657-667.
    2. Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc.
    3. Sorjonen, Pasi, 2002. "Ex-Dividend Day Stock Returns and Tick Rules," Discussion Papers 675, The Research Institute of the Finnish Economy.
    4. Bali, Rakesh & Hite, Gailen L., 1998. "Ex dividend day stock price behavior: discreteness or tax-induced clienteles?," Journal of Financial Economics, Elsevier, vol. 47(2), pages 127-159, February.
    5. VT Alaganar & Graham Partington & Max Stevenson, 1999. "Do Ex-Dividend Drop-Offs Differ Across Markets? Evidence from Internationally Traded (ADR) Stocks," Working Paper Series 92, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    6. Rydqvist, Kristian & Dai, Qinglei, 2007. "Investigation of the Costly-Arbitrage Model of Price Formation Around the Ex-Dividend Day," CEPR Discussion Papers 6074, C.E.P.R. Discussion Papers.
    7. Clemens Sialm, 2006. "Investment Taxes and Equity Returns," NBER Working Papers 12146, National Bureau of Economic Research, Inc.
    8. David J. Beggs & Christopher L. Skeels, 2006. "Market Arbitrage of Cash Dividends and Franking Credits," The Economic Record, The Economic Society of Australia, vol. 82(258), pages 239-252, September.
    9. William M. Getry & Deen Kemsley & Christopher J. Mayer, 2003. "Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts," Journal of Finance, American Finance Association, vol. 58(1), pages 261-282, February.
    10. Maria Borges, 2008. "The Ex-Dividend Day Stock Price Behavior: The Case of Portugal," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 36(1), pages 15-30, March.

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    Dividends; Stock - Prices;

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