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Investor Tax Heterogeneity and Ex-Dividend Day Trading Volume

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  • DAN DHALIWAL
  • OLIVER ZHEN LI
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    Abstract

    We propose that ex-dividend day excess volume is motivated by tax heterogeneity among investors, and thus is increasing in investor tax heterogeneity. Institutional ownership is our measure of heterogeneity. Since investor heterogeneity is a concave function of institutional ownership, we hypothesize that ex-day volume is a concave function of institutional ownership. Cross-sectional tests support the tax-motivated trading hypothesis. Additional tests, using trade size and pension ownership as proxies for institutional trades, yield similar results. We contribute to the literature by considering the interaction between payout policy and ownership structure in explaining the cross-sectional variation in ex-day volume. Copyright 2006 by The American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 61 (2006)
    Issue (Month): 1 (02)
    Pages: 463-490

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    Handle: RePEc:bla:jfinan:v:61:y:2006:i:1:p:463-490

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    Cited by:
    1. Dai, Qinglei & Rydqvist, Kristian, 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.
    2. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    3. Zhonglan Dai & Edward Maydew & Douglas A. Shackelford & Harold H. Zhang, 2006. "Capital Gains Taxes and Asset Prices: Capitalization or Lock-In?," NBER Working Papers 12342, National Bureau of Economic Research, Inc.
    4. Rantapuska, Elias, 2008. "Ex-dividend day trading: Who, how, and why?: Evidence from the Finnish market," Journal of Financial Economics, Elsevier, vol. 88(2), pages 355-374, May.
    5. Jennifer L. Blouin & Jana Smith Raedy & Douglas A. Shackelford, 2007. "Did Firms Substitute Dividends for Share Repurchases after the 2003 Reductions in Shareholder Tax Rates?," NBER Working Papers 13601, National Bureau of Economic Research, Inc.
    6. Chen, Hung-Ling & Chow, Edward H. & Shiu, Cheng-Yi, 2013. "Ex-dividend prices and investor trades: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 24(C), pages 39-65.
    7. Jeff Whitworth & Yi Zhang, 2010. "Accrued capital gains and ex-dividend day pricing," Managerial Finance, Emerald Group Publishing, vol. 36(8), pages 680-702, August.
    8. Ali, Ashiq & Klasa, Sandy & Zhen Li, Oliver, 2008. "Institutional stakeholdings and better-informed traders at earnings announcements," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 47-61, September.
    9. 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.

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