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The effect of a reduction in price discreteness on ex-day stock returns in a unique environment

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  • Al-Yahyaee, Khamis Hamed

Abstract

This paper examines the effect of a reduction in tick size on ex-dividend day stock price behavior by taking advantage of unique data for which there are no taxes on dividends and capital gains and tick size is fixed for all traded securities. These data allow us to differentiate among competing ex-dividend day hypotheses in the absence of confounding tax effects present in other markets. We find that ex-day premiums increase and abnormal returns decrease after the tick size becomes smaller, which is in line with the market microstructure hypothesis. In contrast, we do not find any significant increase in abnormal volume with a reduction in tick size. This finding is inconsistent with the pattern that should occur if transaction cost is the dominant factor that causes the ex-day phenomenon.

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  • Al-Yahyaee, Khamis Hamed, 2013. "The effect of a reduction in price discreteness on ex-day stock returns in a unique environment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 283-294.
    • Handle: RePEc:eee:intfin:v:23:y:2013:i:c:p:283-294
    DOI: 10.1016/j.intfin.2012.10.003
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    Cited by:

    1. Khamis H. Al-Yahyaee, 2014. "Frequency and Motives for Stock Dividends in a Unique Environment," International Review of Finance, International Review of Finance Ltd., vol. 14(2), pages 295-318, June.
    2. Thanos Verousis & Pietro Perotti & Georgios Sermpinis, 2018. "One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 353-392, February.
    3. Dupuis, Daniel, 2019. "Ex-dividend day price behavior and liquidity in a tax-free emerging market," Emerging Markets Review, Elsevier, vol. 38(C), pages 239-250.
    4. Al-Yahyaee, Khamis Hamed, 2014. "Shareholder wealth effects of stock dividends in a unique environment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 66-81.
    5. Ersan, Oguz & Simsir, Serif Aziz & Simsek, Koray D. & Hasan, Afan, 2021. "The speed of stock price adjustment to corporate announcements: Insights from Turkey," Emerging Markets Review, Elsevier, vol. 47(C).

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    More about this item

    Keywords

    Dividends; Tick size; Market microstructure; Bid-ask spread; Tax effects;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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