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Investigation of the Costly-Arbitrage Model of Price Formation Around the Ex-Dividend Day

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Author Info
Dai, Qinglei
Rydqvist, Kristian
Abstract

We estimate the costly-arbitrage model of Boyd and Jagannathan (1994) using Norwegian stock market data. Taxable distributions take place at two separate dates, one that entails the distribution of an imputation-tax credit and another the distribution of the cash dividend. We find that the costly-arbitrage model is consistent with observed stock returns around the ex-dividend day, but the model cannot explain the return patterns around the distribution of the tax credit. We relate the difference in price formation to uncertainty.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6074.

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Date of creation: Feb 2007
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Handle: RePEc:cpr:ceprdp:6074

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Related research
Keywords: costly-arbitrage model; estimation risk; Ex-dividend day; imputation-tax credit; legal risk; withholding tax;

Find related papers by JEL classification:
C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
D40 - Microeconomics - - Market Structure and Pricing - - - General
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion

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  1. John H. Boyd & Ravi Jagannathan, 1994. "Ex-dividend price behavior of common stocks," Working Papers 500, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  2. Elton, Edwin J & Gruber, Martin J, 1970. "Marginal Stockholder Tax Rates and the Clientele Effect," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 68-74, February. [Downloadable!] (restricted)
  3. Michaely, Roni & Vila, Jean-Luc, 1996. "Trading Volume with Private Valuation: Evidence from the Ex-dividend Day," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(2), pages 471-509. [Downloadable!] (restricted)
  4. Daunfeldt, Sven-Olov, 2002. "Tax Policy Changes and Ex-dividend Behavior: The Case of Sweden," UmeÃ¥ Economic Studies 585, Umeå University, Department of Economics. [Downloadable!]
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  7. Cannavan, Damien & Finn, Frank & Gray, Stephen, 2004. "The value of dividend imputation tax credits in Australia," Journal of Financial Economics, Elsevier, vol. 73(1), pages 167-197, July. [Downloadable!] (restricted)
  8. Florentsen, Bjarne & Rydqvist, Kristian, 2002. "Ex-Day Behavior When Investors and Professional Traders Assume Reverse Roles: The Case of Danish Lottery Bonds," Journal of Financial Intermediation, Elsevier, vol. 11(2), pages 152-175, April. [Downloadable!] (restricted)
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  11. Milonas, Nikolaos T. & Travlos, Nickolaos G. & Xiao, Jason Zezhong & Tan, Cunkai, 2006. "The ex-dividend day stock price behavior in the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 14(2), pages 155-174, April. [Downloadable!] (restricted)
  12. Dan Dhaliwal & Oliver Zhen Li, 2006. "Investor Tax Heterogeneity and Ex-Dividend Day Trading Volume," Journal of Finance, American Finance Association, vol. 61(1), pages 463-490, 02. [Downloadable!] (restricted)
  13. Bell, L. & Jenkinson, T., 2000. "New Evidence of the Impact of Dividend Taxation and on the Identity of the Marginal Investor," Economics Series Working Papers 9924, University of Oxford, Department of Economics.
    Other versions:
  14. Dyl, Edward A, 1977. "Capital Gains Taxation and Year-End Stock Market Behavior," Journal of Finance, American Finance Association, vol. 32(1), pages 165-75, March. [Downloadable!] (restricted)
  15. Kato, Kiyoshi & Loewenstein, Uri, 1995. "The Ex-Dividend-Day Behavior of Stock Prices: The Case of Japan," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(3), pages 817-47. [Downloadable!] (restricted)
  16. Michaely, Roni & Murgia, Maurizio, 1995. "The Effect of Tax Heterogeneity on Prices and Volume around the Ex-dividend Day: Evidence from the Milan Stock Exchange," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(2), pages 369-99. [Downloadable!] (restricted)
  17. Bartholdy, Jan & Briown, Kate, 2002. "Testing for Multiple Types of Marginal Investor in Ex-day Pricing," Finance Working Papers 02-12, University of Aarhus, Aarhus School of Business, Department of Business Studies. [Downloadable!]
  18. Grinblatt, Mark & Keloharju, Matti, 2004. "Tax-loss trading and wash sales," Journal of Financial Economics, Elsevier, vol. 71(1), pages 51-76, January. [Downloadable!] (restricted)
    Other versions:
  19. 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. [Downloadable!] (restricted)
  20. 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. [Downloadable!]
    Other versions:
  21. Green, Richard C. & Rydqvist, Kristian, 1999. "Ex-day behavior with dividend preference and limitations to short-term arbitrage: the case of Swedish lottery bonds," Journal of Financial Economics, Elsevier, vol. 53(2), pages 145-187, August. [Downloadable!] (restricted)
  22. Branch, Ben, 1977. "A Tax Loss Trading Rule," Journal of Business, University of Chicago Press, vol. 50(2), pages 198-207, April. [Downloadable!] (restricted)
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    Other versions:
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