Abstract
Past research shows that the difference between dividend amount and ex-dividend day price drop reflects the transaction costs and the differential in the tax rates on dividends and capital gains. Moreover, it is also documented that the higher the dividend yield, the lower is the ex-dividend day return. This paper focuses on large special dividends and tests the two competing hypothesis, tax hypothesis and short term trading hypothesis. Our focus on large special dividends is motivated by the following three considerations. First, special dividends have experienced a surge in recent years. Second, special dividends are important for dividend capture by institutions, corporations and arbitragers. Third, using a sample of large special dividends allows us to reduce the market microstructure effects and focus more directly on the two competing hypotheses. Based on a sample of large special dividends, we find that price drop on ex-dividend day is significantly less than the dividend amount. Furthermore, we show that ex-dividend day returns are positive and hence, are not fully arbitraged away. Our tests indicate that tax hypothesis explains some portion of ex-dividend day abnormal returns even for large special dividends, whereas the support for the short-term trading hypothesis is weak.
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Notes
These figures are the ratios of aggregate dividend dollar amount of special dividends to that of regular dividends. Dividend values are computed by multiplying total share outstanding by the dividend amount. Dividend amount and share outstanding values are from CRSP daily stock database. Regular dividends are dividends with distribution codes 1222, 1232, 1242 and 1252. Special dividends are dividends with distribution codes 1262, 1272 and 1282.
Tax exclusion varies from 70 to 85 % in our sample period, and does not apply to dividends from closed-end funds and REITs.
Michaley and Vila (1995) develop a model which shows that ex-dividend day volume depends also on tax-induced investor heterogeneity and they show that trading volume decreases as tax heterogeneity decreases.
NYSE Rule 118 and AMEX Rule 132 dictate that open limit buy orders are reduced by the cash dividend amount and with discrete prices, if the resulting price is not a tick multiple, it is further lowered to the next tick. Prices in limit sell orders are not changed.
This period increased to 45 days from 16 days with the Tax Reform Act of 1984 (July 18, 1984).
Earnings announcement dates are obtained from COMPUSTAT.
We lose two observations after applying this filter.
We repeat this analysis using returns in excess of value weighted market returns as the dependent variable and find similar results. These results are not tabulated for the sake of brevity, but available upon request.
We also estimate a model in which INDTAXRATY and EXVOL are the only independent variables. We find that the coefficients on EXVOL and INDTAXRATY are statistically significant at the 1 and 5 % level, respectively consistent with the results presented in Table 5. These resulted are not tabulated for the sake of brevity. We thank an anonymous referee for this suggestion.
For the sake of brevity these results are not tabulated, but they are available upon request.
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Chowdhury, J., Sonaer, G. Ex-dividend day abnormal returns for special dividends. J Econ Finan 40, 631–652 (2016). https://doi.org/10.1007/s12197-015-9317-7
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DOI: https://doi.org/10.1007/s12197-015-9317-7