Ex‐Dividend Profitability and Institutional Trading Skill

Abstract

We use institutional trading data to examine whether skilled institutions exploit positive abnormal ex‐dividend returns. Results show that institutions concentrate trading around certain ex‐dates, and earn higher profits around these events. Dividend capture trades represent 6% of all institutional buy trades but contribute 15% of overall abnormal returns. Institutional dividend capture trading is persistent. Institutional ex‐day profitability is also strongly cross‐sectionally related to trade execution skill. The relation between execution skill and profits disappears around placebo non‐ex‐days. Results suggest that skilled institutions target certain opportunities rather than benefiting uniformly over time. Furthermore, only skilled institutions can profit from dividend capture.

Identifying and treating outliers in finance

“…1 Researchers often seek to identify these potential outliers by examining descriptive statistics regarding the variables of interest (Dittmar & Duchin, 2016) effectively examining observations three standard deviations from the mean. After identifying these influential observations, the econometrician typically relies on mitigation techniques to remedy this outlier problem (Henry & Koski, 2017). A review of recent articles that identify outliers in prominent finance journals indicates that almost all studies rely on univariate identification.…”

The Impact of Market Structure on Ex‐Dividend Day Stock Price Behavior

“…Moreover, the risk is diversifiable as there are several thousand ex‐dividend events in a calendar year and the risk associated with these events should be temporally independent. Consistent with this, Henry and Koski () find that bid‐ask spreads and firm size (and investor execution skill) are more important than firm risk in determining the profitability of dividend capture strategies. Most important, and consistent with our partitions for other firm attributes, we find that the NASDAQ PDRs significantly increase across all risk quartiles (the NASDAQ PDRs more than triple from the earlier period to the later period), resulting in the PDR difference substantially reducing across all risk quartiles.…”

“…Recently, Henry and Koski (2017) use a proprietary data set that allows them to accurately measure execution costs and find that dividend capture strategies are not profitable on average, though skilled investors do profitably pursue dividend capture strategies on targeted ex-days. Henry and Koski (2017) exclude NASDAQ-listed firms from their sample and focus on NYSE-listed firms to "control for variation in microstructure across exchanges that might affect ex-day returns" (p. 465). We take advantage of NASDAQ and NYSE market structure differences to explore the role of market structure on the ex-day price anomaly.…”

Investor behavior, stock returns and CDS spreads: evidence from foreign and domestic investors in Korea

“…By contrast, a large body of scholarly work provides evidence that institutions are informed and/or skilled (e.g. Henry and Koski, 2017;Mudalige et al, 2020). Given the extensive evidence that institutions (individuals) are informed (uninformed) and skilled (unsophisticated) in most empirical studies, we expect that domestic institutions (individuals) exhibit trading behavior similar (opposite) to that of foreigners (see Hypothesis 1a and H2a).…”