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Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes

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  • Murray Frank
  • Ravi Jagannathan

Abstract

It is well documented that on average, stock prices drop by less than the value of the dividend on ex-dividend days. This has commonly been attributed to the effect of tax clienteles. We use data from the Hong Kong stock market where neither dividends nor capital gains are taxed. As in the U.S.A. the average stock price drop is less than the value of the dividend; specifically, in Hong Kong the average dividend was HK $0.12 and the average price drop was HK $0.06. We are able to account for this both theoretically and empirically through market microstructure based arguments.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 229.

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Date of creation: 1997
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Handle: RePEc:fip:fedmsr:229

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Keywords: Dividends ; Stock - Prices;

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References

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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.
  2. Conroy, Robert M & Harris, Robert S & Benet, Bruce A, 1990. " The Effects of Stock Splits on Bid-Ask Spreads," Journal of Finance, American Finance Association, vol. 45(4), pages 1285-95, September.
  3. Kato, Kiyoshi & Loewenstein, Uri, 1995. "The Ex-Dividend-Day Behavior of Stock Prices: The Case of Japan," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 817-47.
  4. Franklin Allen & Roni Michaely, . "Dividend Policy (Reprint 050)," Rodney L. White Center for Financial Research Working Papers 14-94, Wharton School Rodney L. White Center for Financial Research.
  5. Eades, Kenneth M. & Hess, Patrick J. & Kim, E. Han, 1984. "On interpreting security returns during the ex-dividend period," Journal of Financial Economics, Elsevier, vol. 13(1), pages 3-34, March.
  6. 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.
  7. Long, John Jr., 1978. "The market valuation of cash dividends : A case to consider," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 235-264.
  8. Michaely, Roni & Vila, Jean-Luc, 1995. "Investors' Heterogeneity, Prices, and Volume around the Ex-Dividend Day," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(02), pages 171-198, June.
  9. Grinblatt, Mark S. & Masulis, Ronald W. & Titman, Sheridan, 1984. "The valuation effects of stock splits and stock dividends," Journal of Financial Economics, Elsevier, vol. 13(4), pages 461-490, December.
  10. Koski, Jennifer Lynch, 1996. "A Microstructure Analysis of Ex-dividend Stock Price Behavior before and after the 1984 and 1986 Tax Reform Acts," The Journal of Business, University of Chicago Press, vol. 69(3), pages 313-38, July.
  11. Karpoff, Jonathan M. & Walkling, Ralph A., 1988. "Short-term trading around ex-dividend days : Additional evidence," Journal of Financial Economics, Elsevier, vol. 21(2), pages 291-298, September.
  12. Karpoff, Jonathan M. & Walkling, Ralph A., 1990. "Dividend capture in NASDAQ stocks," Journal of Financial Economics, Elsevier, vol. 28(1-2), pages 39-65.
  13. Eades, Kenneth M & Hess, Patrick J & Kim, E Han, 1994. " Time-Series Variation in Dividend Pricing," Journal of Finance, American Finance Association, vol. 49(5), pages 1617-38, December.
  14. Hayashi, Fumio & Jagannathan, Ravi, 1990. "Ex-day behavior of japanese stock prices: New insights from new methodology," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 401-427, December.
  15. Poterba, James M., 1986. "The market valuation of cash dividends : The citizens utilities case reconsidered," Journal of Financial Economics, Elsevier, vol. 15(3), pages 395-405, March.
  16. Miller, Merton H & Scholes, Myron S, 1982. "Dividends and Taxes: Some Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1118-41, December.
  17. Lakonishok, Josef & Vermaelen, Theo, 1986. "Tax-induced trading around ex-dividend days," Journal of Financial Economics, Elsevier, vol. 16(3), pages 287-319, July.
  18. Kryzanowski, Lawrence & Zhang, Hao, 1996. "Trading Patterns of Small and Large Traders around Stock Split Ex-dates," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 19(1), pages 75-90, Spring.
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