Ex-dividend Day Trading: Who, How, and Why?

Abstract

This study examines ex-dividend day trading behavior of all investors in the entire Finnish stock market. Consistent with the dynamic dividend clientele explanation, investors with a preference for dividend income buy shares cum-dividend and sell ex-dividend; the reverse is true for investors with the opposite preferences. Untaxed mutual funds engage in overnight arbitrage by selling shares cum and buying ex. Studying trades at the level of an individual investor shows idiosyncratic risk to be an important determinant in the choice of tax arbitrage stock. Analysis of the proportion of tax-motivated overnight trades reveals that transaction costs and dividend yield jointly determine whether the degree of tax arbitrage activity is nonzero. JEL classification: G35

The Ex-Day Phenomenon and Share Price Performance on Emerging Markets

“…Traders subject to higher tax rates on dividends sell stocks right before ex-day and purchase the stocks back on ex-day; investor types subject to lower taxes show a reverse trading pattern. The findings indicate evidence of a dynamic dividend clientele concept, consistent with Koski, Scruggs [1998], Felixson, Liljeblom [2008], Rantapuska [2008]. Rantapuska [2008] supports the dynamic clientele theory for Finland -traders who have a choice regarding dividends purchase stocks right before the ex-day and dispose of them on the ex-day and vice versa.…”

“…The findings indicate evidence of a dynamic dividend clientele concept, consistent with Koski, Scruggs [1998], Felixson, Liljeblom [2008], Rantapuska [2008]. Rantapuska [2008] supports the dynamic clientele theory for Finland -traders who have a choice regarding dividends purchase stocks right before the ex-day and dispose of them on the ex-day and vice versa. Idiosyncratic risk was determined to be a significant factor in the preference for shares to make an ex-dividend event Higher School of Economics trade.…”

“…As an alternative, we highlight the second method, which goes another way: first, price drop ratios are estimated and then the potential impact of various factors upon this ratio (or on abnormal return) is being tested [Milonas et al, 2006;Isaksson, 2013;Efthymiou, Leledakis, 2014]. The third approach scrutinizes detailed intraday trading data on ex-dividend days to understand which types of investors bought or sold stocks [Koski, Scruggs, 1998;Graham, Kumar, 2006;Rantapuska, 2008]. We concentrate on the second approach, because it does not require specific detailed information, as the third one does.…”

What do we know about the dividend puzzle? – A literature survey

“…Thus, Bell and Jenkinson conclude that taxation affects the valuation of dividend income and pension funds are the effective marginal investors for high-yielding firms in the U.K. Milonas et al (2006) analyse the ex-dividend day stock price behaviour in China and they report overall findings consistent with the tax effect hypothesis. Rantapuska (2008) investigates the trading behaviour of investors around the ex-dividend days in Finland. The results show that investors with a preference for dividend income buy shares cum-dividend and sell ex-dividend, and vice-a-versa, consistent with the dynamic dividend clientele hypothesis.…”

Evidências do Prêmio do Mês do Dividendo no Mercado Acionário Brasileiro

“…Lasfer (1995), por outro lado, avalia o impacto de uma mudança na lei que reduz os impostos sobre dividendos e evidencia retornos insignificantes em torno do dia do exercício após a lei ser implementada. Rantapuska (2008) analisa o comportamento do mercado no dia do exercício e mostra que, se os custos de transação são baixos e a razão dividendo-preçoé alta, investidores transacionam em torno dessa data para obter vantagens fiscais. Eades et al (1994) encontram evidências de uma variação nos preços dos ativos no dia do exercício e que depende da razão dividendopreço.…”