Investor Tax Heterogeneity and Ex-Dividend Day Trading Volume




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    • Dhaliwal is from the University of Arizona and the University of Auckland and Li is from the University of Notre Dame. We thank Ashiq Ali, Robert Battalio, Dan Collins, Merle Erickson, Michelle Hanlon, Roger Huang, Hang Li, Edward Maydew, Richard Mendenhall, Lil Mills, Kaye Newberry, Paul Schultz, Bill Schwartz, Jim Seida, Rob Stambaugh (the Editor), Bob Trezevant, Hong Xie, an anonymous referee, and seminar participants at the University of Arizona, University of Chicago, University of Iowa, University of Notre Dame, University of Rochester, University of Southern California, University of Waterloo, University of Western Ontario, Indiana University, Rice University, Tulane University, and Yale University for helpful comments. All errors are ours.


We propose that ex-dividend day excess volume is motivated by tax heterogeneity among investors, and thus is increasing in investor tax heterogeneity. Institutional ownership is our measure of heterogeneity. Since investor heterogeneity is a concave function of institutional ownership, we hypothesize that ex-day volume is a concave function of institutional ownership. Cross-sectional tests support the tax-motivated trading hypothesis. Additional tests, using trade size and pension ownership as proxies for institutional trades, yield similar results. We contribute to the literature by considering the interaction between payout policy and ownership structure in explaining the cross-sectional variation in ex-day volume.