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A model of stock price adjustment after dividends

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  • Maria Rosa Borges

Abstract

Purpose - The purpose of this paper is to discuss the stock price adjustment after a dividend distribution, allowing for different types of investors and market imperfections, including taxes and transaction costs. Design/methodology/approach - An arbitrage model is developed to determine the possible equilibria for the stock price adjustment, after a dividend distribution. The approach is theoretical, providing general results. Findings - The model shows that, in the presence of different types of investors, a unique equilibrium only exists in the absence of transaction costs. The allowance for market imperfections, such as taxes and transactions costs, implies that there is not a unique equilibrium for the level of stock price adjustment following a dividend distribution event, but rather there is much possible equilibrium. It is showed that the observation of abnormal trading volume around the dividend event may give us some insights on the identification of which investors are present in the market. Practical implications - On future studies of the stock price adjustment after dividend distributions, it should be taken into account that there is no unique equilibrium. Originality/value - The main contribution of this paper is to show that the existence of taxes and transaction costs precludes the determination of a unique equilibrium point for the stock price adjustment after a dividend distribution.

Suggested Citation

  • Maria Rosa Borges, 2009. "A model of stock price adjustment after dividends," Journal of Economic Studies, Emerald Group Publishing, vol. 36(5), pages 508-521, September.
  • Handle: RePEc:eme:jespps:v:36:y:2009:i:5:p:508-521
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    References listed on IDEAS

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    1. Engle, Robert F. & Patton, Andrew J., 2004. "Impacts of trades in an error-correction model of quote prices," Journal of Financial Markets, Elsevier, vol. 7(1), pages 1-25, January.
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    7. Jennifer S. Conrad, 2001. "Institutional Trading and Soft Dollars," Journal of Finance, American Finance Association, vol. 56(1), pages 397-416, February.
    8. Ellis, Katrina & Michaely, Roni & O'Hara, Maureen, 2000. "The Accuracy of Trade Classification Rules: Evidence from Nasdaq," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 529-551, December.
    9. Harris, Lawrence, 1989. "A Day-End Transaction Price Anomaly," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(01), pages 29-45, March.
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