Tax-Induced Trading of Equity Securities: Evidence from the ADR Market


  • Sandra Renfro Callaghan,

  • Christopher B. Barry

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    • Collaghan and Barry are from the M. J. Neeley School of Business, Texas Christian University. The authors are grateful to Joseph Anthony, Stan Block, Greg Geisler, David Guenther, Sanjay Gupta, Steve Lim, Vassil Mihov, Kathy Petroni, Edmund Outslay, Mel O'Connor, Mo Rodriguez, Chandra Subramaniam, Bob Trezevant, Andy Waisburd, and especially to the editor, Rick Green, and an anonymous referee for numerous helpful comments on earlier drafts. The authors also thank David Cuellar of PriceWaterhouseCoopers, Bob Gordon of Twenty-First Securities Corp., Jim Hille of the Teachers Retirement System of Texas, and Bob Willens of Lehman Brothers for helpful discussions of tax trading strategies. They are also grateful to seminar participants at the 1999 Illinois Tax Symposium, Texas Christian University, Emory University, the University of Massachusetts, the University of Utah, Louisiana State University, Wake Forest University, and Villanova University. Professor Callaghan acknowledges financial support from the Deloitte and Touche Foundation, Michigan State University, the Luther King Capital Management Center for Financial Studies, and the Charles Tandy American Enterprise Center at Texas Christian University.


We examine ex-dividend date trading of American Depositary Receipts (ADRs) using a sample of 1,043 dividends over the period 1988 to 1995. ADR dividends are often subject to foreign withholding taxes, creating incentives for certain investors to avoid the distribution. ADRs exhibit negative abnormal ex-dividend day returns, and their prices behave consistently with their related withholding taxes. Abnormal trading volume for taxable issues exceeds 130 percent and 300 percent of normal volume on the cum- and ex-dates, respectively. Abnormal volume is an increasing function of foreign withholding tax rates and decreasing function of transactions costs. This abnormal ex-date trading activity is consistent with tax-motivated trading.