A Microstructure Analysis of Ex-dividend Stock Price Behavior before and after the 1984 and 1986 Tax Reform Acts
This article extends ex-dividend research by explicitly modeling trading at bid and ask quotations. This refinement distinguishes between buying and selling for long-term investors and short-term dividend capture traders. It also explicitly incorporates the bid-ask spread and eliminates some potential measurement errors that may bias returns. Marginal conditions are tested during 1983 and 1988, periods that span the 1984 and 1986 Tax Reform Acts. Results for long-term investors are consistent with the elimination of favorable capital gains tax rates. At observed prices, tax-neutral short-term traders cannot profit. Corporate dividend capture traders face profit opportunities during 1983 that disappear by 1988. Copyright 1996 by University of Chicago Press.