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Ex-Dividend Day Price and Volume: The Case of 2003 Dividend Tax Cut

2008; University of Chicago Press; Volume: 61; Issue: 1 Linguagem: Inglês

10.17310/ntj.2008.1.05

1944-7477

Yi Zhang, Kathleen A. Farrell, Todd A. Brown,

Financial Reporting and Valuation Research

We examine the impact of the 2003 dividend tax cut, which removes the differential taxation between dividends and capital gains for individual investors, on the ex-dividend day price and trading volume. We find the ex-dividend day price and volume are affected by taxes, risk, and transaction costs. The ex-dividend day price drop ratio (excess return) increases (decreases) and dividend clienteles weaken after the tax cut. Ex-dividend day abnormal volume among high dividend yield stocks decreases after the tax cut consistent with a diminished motivation for tax-induced trading. Our results suggest that individual investors have a measurable effect on the ex-dividend day price and trading volume.