Liquidity and ex-dividend behavior in emerging markets

This chapter investigates the explanatory effect of a new liquidity measure on the ex-dividend day price premium in a tax-free emerging market. It is well documented that prices drop less than the dividend amount on the ex-day; this market inefficiency is generally attributed to the clientele effect and various structural frictions. We show that, even in the absence of the usual microstructure impediments, abnormal returns persist. We derive a new measure of liquidity (the free-float illiquidity) and find this measure to be statistically significant in the determination of the ex-dividend day price anomaly. We argue that this innovative metric accounts for the reduction in the tradable stock associated with many frontier markets where influential block holders restrict tradeable shares. A 1% reduction in liquidity yields a 2.25% increase in unrealized abnormal returns, indicating that trading restrictions can partially explain the ex-dividend return puzzle.