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Marginal Stockholder Tax Effects and Ex-Dividend-Day Price Behavior: Evidence From Taxable Versus Nontaxable Closed-End Funds

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Author Info

  • Edwin J. Elton

    (Stern School of Business, New York University)

  • Martin J. Gruber

    (Stern School of Business, New York University)

  • Christopher R. Blake

    (Fordham University Graduate School of Business)

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    Abstract

    Almost all research on the movement of stock prices on ex-dividend days has found that prices decline by less than the dividend. Though this is consistent with tax effects, several papers have argued that this phenomenon could be caused by market microstructure effects. In this paper we make use of a natural experiment that provides support for the tax explanations of ex-dividend behavior. Some closed-end funds have taxable, and some have nontaxable, dividend distributions. Both types are subject to taxes on capital gains. The implication of this for ex-dividendday price behavior is very different between these two types of funds if taxes matter. This paper demonstrates that the direction of ex-dividendday price behavior is consistent with a tax explanation and that ex-dividend-day price behavior changes, as theory would suggest, with changes in the tax law. © 2005 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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    Bibliographic Info

    Article provided by MIT Press in its journal Review of Economics and Statistics.

    Volume (Year): 87 (2005)
    Issue (Month): 3 (August)
    Pages: 579-586

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    Handle: RePEc:tpr:restat:v:87:y:2005:i:3:p:579-586

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    Web page: http://mitpress.mit.edu/journals/

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    Web: http://mitpress.mit.edu/journal-home.tcl?issn=00346535

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    Cited by:
    1. Efthymiou, Vassilis A. & Leledakis, George N., 2011. "The price impact of the disposition effect on the ex-dividend day of NYSE and AMEX common stocks," MPRA Paper 28791, University Library of Munich, Germany.
    2. Efthymiou, Vassilis A. & Leledakis, George N., 2013. "Intraday analysis of the limit order bias at the ex-dividend day of U.S. common stocks," MPRA Paper 49770, University Library of Munich, Germany.
    3. William Hardin & Gow-Cheng Huang & Kartono Liano, 2012. "Dividend Size, Yield, Clienteles and REITs," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 45(2), pages 435-449, August.
    4. Chen, Hung-Ling & Chow, Edward H. & Shiu, Cheng-Yi, 2013. "Ex-dividend prices and investor trades: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 24(C), pages 39-65.
    5. Tseng, Yun-lan & Hu, Shing-yang, 2013. "Tax reform and the identity of marginal traders around ex-dividend days," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 25(C), pages 181-199.
    6. Hartzmark, Samuel M. & Solomon, David H., 2013. "The dividend month premium," Journal of Financial Economics, Elsevier, Elsevier, vol. 109(3), pages 640-660.

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