Ex-Dividend Day Behavior in the Absence of Taxes and Price Discreteness


  • *We would like to thank John Graham, Bruce Grundy, Richard Heaney, Douglas Foster, Ravi Jain, Palani-Rajan Kadapakkam, and Keith Jakob. We also thank the participants at the 17th Asian FA/FMA Conference for their valuable comments.

Prof. Terry Walter
Professor of Finance
Department of Accounting and Finance
Division of Economic and Financial Studies
Macquarie University
NSW 2109


We examine the ex-dividend day behavior in a unique setting where (1) there are neither taxes on dividends nor on capital gains, (2) stock prices have been decimalized, (3) dividends are distributed annually, and (4) we have data that enable us to examine bid–ask bounce effects. In this economy, any price decline that is smaller than the dividends cannot be attributed to taxes and price discreteness. Like previous studies, we find that the stock price drops by less than the amount of dividends and there is a significant positive ex-day return. By examining abnormal volumes around the ex-dividend day, we find no evidence of short-term trading. We are able to account for our results using market microstructure models. When the impact of market microstructure is taken into account, the ex-dividend drop is not significantly different from the value of the dividend paid.