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Taxation and the Ex-Dividend Day Behavior of Common Stock Prices

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  • Jerry R. Green

Abstract

The behavior of stock prices around ex-dividend days has been suggested as evidence for tax-induced clientele effects and as a means to estimate the average effective tax rate faced by investors. In this paper these possibilities are examined theoretically and empirically. Theoretically it is shown that the measured price drop per dollar of dividend may provide a biased estimate of the effective tax rate. Looking at the volume of trade around ex-dividend days we show that the conditions under which it would be unbiased are unlikely to hold. Strong evidence, based on a broader database than that used by previous investigators, is presented for the presence of the clientele effect.

Suggested Citation

  • Jerry R. Green, 1980. "Taxation and the Ex-Dividend Day Behavior of Common Stock Prices," NBER Working Papers 0496, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0496
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    References listed on IDEAS

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    1. Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
    2. Roger H. Gordon & David F. Bradford, 1979. "Taxation and the Stock Market Valuation of Capital Gains and Dividends: Theory and Empirical Results (Rev)," NBER Working Papers 0409, National Bureau of Economic Research, Inc.
    3. Elton, Edwin J & Gruber, Martin J, 1970. "Marginal Stockholder Tax Rates and the Clientele Effect," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 68-74, February.
    4. Alan J. Auerbach, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(3), pages 433-446.
    5. Roger H. Gordon & David F. Bradford, 1980. "Taxation and the Stock Market Valuation of Capital Gains and Dividends: Theory and Empirical Results," NBER Chapters, in: Econometric Studies in Public Finance, pages 109-136, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
    2. Poterba, James M & Summers, Lawrence H, 1984. "New Evidence that Taxes Affect the Valuation of Dividends," Journal of Finance, American Finance Association, vol. 39(5), pages 1397-1415, December.
    3. Asimakopoulos, Panagiotis N. & Tsangarakis, Nickolaos V. & Tsiritakis, Emmanuel D., 2015. "Price adjustment method and ex-dividend day returns in a different institutional setting," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 1-12.
    4. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Auerbach, Alan J., 1983. "Stockholder tax rates and firm attributes," Journal of Public Economics, Elsevier, vol. 21(2), pages 107-127, July.
    6. James M. Poterba, 1983. "Interpreting Ex-Dividend Evidence: The Citizens Utilities Case Reconsidered," NBER Working Papers 1131, National Bureau of Economic Research, Inc.
    7. Philip Brown & Alex Clarke, 1993. "The Ex-Dividend Day Behaviour of Australian Share Prices Before and After Dividend Imputation," Australian Journal of Management, Australian School of Business, vol. 18(1), pages 1-40, June.
    8. Khamis Al Yahyaee & Toan Pham & Terry Walter, 2008. "Ex‐Dividend Day Behavior in the Absence of Taxes and Price Discreteness," International Review of Finance, International Review of Finance Ltd., vol. 8(3‐4), pages 103-123, September.
    9. Ashish Pandey, 2021. "Reference Prices and Turnover: Evidence from Small-Capitalization Stocks," JRFM, MDPI, vol. 14(1), pages 1-14, January.

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