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The free dividend fallacy in the Chinese stock market: Evidence from stock pricing behavior around ex-dividend day

Author

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  • Chang, Jeffery Jinfan
  • Du, Huancheng
  • Ni, Xiaoran
  • Wang, Yuheng

Abstract

We document a unique anomalous pattern in stock prices around the ex-dividend day. Stock prices significantly rise above their fair value prior to the ex-dividend day; this is followed by an excessive ex-dividend day price drop relative to the size of the dividend, leading to a significant and negative market-adjusted return on the ex-dividend day. In an attempt to explain such price anomalies, we examine several major dividend related theories and hypotheses including tax-based clientele effect, self-control theory, investors’ risk aversion theory and free dividend fallacy hypothesis. We find empirical evidence that are in support of the free dividend fallacy hypothesis while the implications of other existing theories fail to match with our empirical data. We conclude that individual investors in the Chinese stock market are likely to suffer the free dividend fallacy which in turn serves as the main driver for the documented stock price anomalies around the ex-dividend day.

Suggested Citation

  • Chang, Jeffery Jinfan & Du, Huancheng & Ni, Xiaoran & Wang, Yuheng, 2026. "The free dividend fallacy in the Chinese stock market: Evidence from stock pricing behavior around ex-dividend day," Journal of Empirical Finance, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:empfin:v:86:y:2026:i:c:s0927539826000423
    DOI: 10.1016/j.jempfin.2026.101727
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G40 - Financial Economics - - Behavioral Finance - - - General

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