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Sharing the dividend tax credit pie: The influence of individual investors on ex-dividend day returns

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  • Ainsworth, Andrew
  • Lee, Adrian D.

Abstract

Taxes create distortions in financial markets. A tax credit attached to dividend payments in Australia creates a wedge in valuations as it can be utilized only by certain investors. Individual investors, who benefit most from the credit, buy aggressively cum-dividend and sell aggressively ex-dividend, demanding liquidity from institutional investors. Stocks with higher net purchases by individual investors operating through discount brokers in the cum-dividend period have ex-day returns that are 25 bps lower. The tax distortion allows individual investors to capture the tax credit and institutional investors to increase trading profits. Individual investor trading influences ex-dividend pricing.

Suggested Citation

  • Ainsworth, Andrew & Lee, Adrian D., 2023. "Sharing the dividend tax credit pie: The influence of individual investors on ex-dividend day returns," Journal of Financial Markets, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:finmar:v:62:y:2023:i:c:s1386418122000325
    DOI: 10.1016/j.finmar.2022.100740
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    More about this item

    Keywords

    Dividend clienteles; Individual investors; Ex-dividend day premium; Order choice;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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