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Ex-dividend pricing, taxes and arbitrage opportunities: the case of the Portuguese stock exchange

Listed author(s):
  • Jorge Farinha


    (CETE, Faculdade de Economia, Universidade do Porto)

  • Miguel Sôro


    (Banco Espírito Santo, Porto)

Registered author(s):

    This paper examines the ex-dividend stock price behaviour in the Portuguese Stock Exchange between 1993 and 2002, a unique period characterized by a richness of different investor tax statuses and several tax changes. After classifying investors according to their tax profile and corresponding dividend tax discrimination factorss, we find that the pursuit of a short-term trading strategy around the ex-dividend day does not yield significant abnormal returns after tax and bid-ask costs. These results are in accordance with the inexistence of arbitrage opportunities even when extreme tax situations are considered under different dividend yield scenarios. It is also shown that the observed ex-dividend price reduction is consistent with a tax explanation and in disagreement with market microstructure arguments. Further tests indicate that the price change is not significantly different from the expected theoretical price reduction for a marginal investor which we identified most likely as a long-term shareholder in high-tax brackets. Finally, our results only provide a weak support for the clientele hypothesis.

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    Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series CEF.UP Working Papers with number 0508.

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    Length: 33 pages
    Date of creation: Dec 2005
    Handle: RePEc:por:cetedp:0508
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