Tax Reform and Ex-Dividend Day Behavior




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    • Faculty of Management, Tel-Aviv University; Department of Applied Economics, Catholic University of Leuven and E.I.A.S.M., Brussels. The paper was written when both authors were at the University of British Columbia. We would like to thank Bruce Dietrich-Campbell and Jeff Kwan for research assistance. Helpful comments were received from Robert Hamada, John Heaney, James MacBeth, Merton Miller, Myron Scholes, and the participants of the Finance workshops at UBC, Cornell University, Duke University, and University of North Carolina at Chapel Hill. Special thanks for their insightful comments go to Michael Brennan and Krishna Ramaswamy. The paper was presented at the 1982 Western Finance Association meetings. Correspondence to: Josef Lakonishok and Theo Vermaelen, Faculty of Management, Tel Aviv University; Ramat-Avio Tel Aviv Israel.


This paper investigates the effect of a major Canadian tax reform on the ex-dividend day behavior of companies on the Toronto Stock Exchange. The results are inconsistent with the hypothesis that price changes on ex-dividend days reflect the relative taxation of dividends and capital gains for the “representative” investor, but are consistent with the hypothesis that ex-dividend day price behavior reflects short-term trading activities.