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Accrued capital gains and ex-dividend day pricing

Author

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  • Jeff Whitworth
  • Yi Zhang

Abstract

Purpose - The purpose of this paper is to show how recent capital gains affect ex-dividend stock pricing. Traditional models assume that investors are motivated to sell a stock before its ex-date to avoid paying higher taxes on dividends. However, if a stock has appreciated significantly, stockholders have an offsetting incentive to delay the realization of capital gains by continuing to hold the stock in spite of the higher dividend tax rate. Design/methodology/approach - This paper develops a model showing that ex-dividend price drops should be greater in the presence of larger accrued capital gains. The model was tested by regressing ex-day pricing measures on the relative size of the recently accrued gain, along with other control variables. Findings - Empirical tests confirm that accrued gains reduce the magnitude of the ex-day effect, increasing the price drop ratio (? Research limitations/implications - This paper's findings suggest that the results of existing empirical investigations of ex-day pricing should be interpreted with some caution, and that future studies should control for gains that occur prior to the ex-date. Originality/value - While the tax clientele explanation of ex-day pricing has been investigated extensively, this is the first study to show how accrued gains and losses impact ex-dividend price changes.

Suggested Citation

  • Jeff Whitworth & Yi Zhang, 2010. "Accrued capital gains and ex-dividend day pricing," Managerial Finance, Emerald Group Publishing, vol. 36(8), pages 680-702, July.
  • Handle: RePEc:eme:mfipps:v:36:y:2010:i:8:p:680-702
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    References listed on IDEAS

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    1. Lasfer, M Ameziane, 1995. " Ex-day Behavior: Tax or Short-Term Trading Effects," Journal of Finance, American Finance Association, vol. 50(3), pages 875-897, July.
    2. Milonas, Nikolaos T. & Travlos, Nickolaos G. & Xiao, Jason Zezhong & Tan, Cunkai, 2006. "The ex-dividend day stock price behavior in the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 14(2), pages 155-174, April.
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    Keywords

    Capital gains; Securities; Dividends; Pricing;

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