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Lost in translation: Delayed ex-dividend price adjustments of Hong Kong ADRs

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  • Kadapakkam, Palani-Rajan
  • Meisami, Alex
  • Shi, Yilun
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    Abstract

    Previous research documents that Hong Kong stocks have a full ex-dividend price adjustment consistent with dividends and capital gains being tax free. We examine ex-dividend price behavior of Hong Kong ADRs to assess the impact of differing tax environments in US and Hong Kong. These ADRs typically go ex-dividend before their underlying stock. They experience significant abnormal returns of 1.16% on their ex-day; the average ex-day price drop is only 30% of the dividend. However, ADR prices drop when the underlying stock goes ex-dividend subsequently. The cumulative ADR price drop is equal to the dividend. Thus, the ADR ex-dividend adjustment resembles that of the underlying stock, consistent with home country tax laws governing ADR price behavior. Neither liquidity nor transaction costs can explain the anomalous delayed ex-dividend adjustment of ADRs.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 3 (March)
    Pages: 647-655

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:3:p:647-655

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Ex-dividend abnormal returns ADRs Hong Kong;

    References

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    1. Murray Frank & Ravi Jagannathan, 1997. "Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes," Staff Report 229, Federal Reserve Bank of Minneapolis.
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    7. Gorman, Larry R. & Mahajan, Arvind & Weigand, Robert A., 2004. "The ex-dividend day behavior of American depository receipts," Journal of Multinational Financial Management, Elsevier, vol. 14(1), pages 1-18, February.
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    10. Aelee Jun & V. T. Alaganar & Graham Partington & Max Stevenson, 2008. "Price and Volume Behavior around the Ex-dividend Day: Evidence on the Value of Dividends from American Depositary Receipts and their Underlying Australian Stocks-super-," International Review of Finance, International Review of Finance Ltd., vol. 8(1-2), pages 21-55.
    11. Christoffersen, Susan E.K. & Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2005. "Crossborder dividend taxation and the preferences of taxable and nontaxable investors: Evidence from Canada," Journal of Financial Economics, Elsevier, vol. 78(1), pages 121-144, October.
    12. Eichler, Stefan & Karmann, Alexander & Maltritz, Dominik, 2009. "The ADR shadow exchange rate as an early warning indicator for currency crises," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1983-1995, November.
    13. David A. Dubofsky, 1992. "A Market Microstructure Explanation of Ex-Day Abnormal Returns," Financial Management, Financial Management Association, vol. 21(4), Winter.
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