Investor Tax Heterogeneity and Ex-Dividend Day Trading Volume - The Effect of Dividend Yield and Institutional Ownership

Li, Zhen

doi:10.2139/ssrn.450043

Cited by 4 publications

(5 citation statements)

References 37 publications

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“…The data avail-ability has reduced the sample to 5,630 in the U.K. and to 829 in Germany. Table 5 Panel A shows that, consistent with the U.S. evidence (e.g., Dhaliwal and Li, 2006), in the U.K., the abnormal trading volume is positive and signifi cant in each event period [-5 to +3], but the magnitude of the abnormal volume of 8.9 percent is about half the 20 percent found in the U.S. In Panel B, I test whether the high payoff stocks as proxied by dividend yield are subject to more trading volume than the low-yield stocks.…”

Section: Is Taxation the Sole Determinant Of Ex-day Returns?supporting

confidence: 67%

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Taxes and Ex-day Returns: Evidence from Germany and the U.K.

Lasfer¹

2008

National Tax Journal

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I analyze the tax systems and tax reforms in Germany and the U.K. and test the hypothesis that ex-day returns are related to each country's tax differential between dividends and capital gains. The results indicate that in the U.K., where this tax differential is high and short-term trading is regulated, ex-day returns are higher, and the market microstructure and short-term trading impacts are weak. In contrast, in Germany, the tax impact is mitigated by short-term trading and market microstructure effects. The results suggest that despite their dividend tax similarities, the institutional differences between the two countries lead to different determinants of ex-day returns.

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Section: Is Taxation the Sole Determinant Of Ex-day Returns?supporting

confidence: 67%

“…While this activity is widely documented in the U.S. (e.g., Dhaliwal and Li, 2006), in the U.K., it is subject to institutional regulation and could incur tax penalties, which depend on the identity and motives of the trader. 9 In contrast, in Germany, dividend stripping is not restricted.…”

Section: Is Taxation the Sole Determinant Of Ex-day Returns?mentioning

confidence: 99%

Taxes and Ex-day Returns: Evidence from Germany and the U.K.

Lasfer¹

2008

National Tax Journal

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“…Grundy (1985), Lakonishok and Vermaelen (1986), and find evidence of abnormal trading volume on the ex-day, which is consistent with dynamic tax-related trading on the ex-day. Dhaliwal and Li (2006) find evidence of excess volume around ex-days, which they attribute to tax-motivated trading. 4 Elton and Gruber (1970) find that the ex-day premium was 0.78 on average in the 1960s, which they interpret to imply that dividends are priced at a 22% disadvantage relative to capital gains (Prediction 21).…”

Section: Dividend Clientelesmentioning

confidence: 93%

A Review of Taxes and Corporate Finance

2005

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This paper reviews domestic and multinational corporate tax research. For each topic, the theoretical arguments explaining how taxes can affect corporate decision-making and firm value are reviewed, followed by a summary of the related empirical evidence and a discussion of unresolved issues. Tax research generally supports the hypothesis that high-tax rate firms pursue policies that provide tax benefits. Many issues remain unresolved, however, including understanding whether tax effects are of first-order importance, why firms do not pursue tax benefits more aggressively, and whether corporate actions are affected by investor-level taxes.

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“…We compute the firm-specific percentage institutional holding as the total number of shares held by institutional investors divided by the total number of shares outstanding. As noted in the prior literature, the aggregate level of institutional ownership is an imperfect measure of heterogeneity in taxrelated payout preferences because some institutional investors, particularly mutual funds, indirectly hold equity for fully taxable individual investors (see, e.g., Dhaliwal and Li 2006). However, to the extent that the proportion of such institutions among all institutional investors is small (see, e.g., Gompers and Metrick 2001), this should not pose a serious problem in our analyses.…”

Section: Sample and Descriptive Statisticsmentioning

confidence: 95%

“…Unlike for institutional investors, for individual investors dividend income prior to the 2003 tax rate reduction was tax-disadvantaged relative to long-term capital gains. Consistent with the prior literature (see, e.g., Dhaliwal et al 1999;Dhaliwal and Li 2006), we measure percentage ownership by individuals as one minus the percentage institutional holding, based on the CDA/ Spectrum Institutional (13-F) holdings database. 13 Our measure of shareholders' rights is based on the index (''G-Score'') compiled by the Investor Responsibility Research Center (IRRC), which comprises 23 corporate governance provisions that measure shareholder rights (see Gompers et al 2003).…”

Section: Sample and Descriptive Statisticsmentioning

confidence: 99%

Executive stock-based compensation and firms’ cash payout: the role of shareholders’ tax-related payout preferences

Aboody

Kasznik

2008

Rev Acc Stud

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We hypothesize that the structure of executive stock-based compensation helps to align managers' payout choices with shareholders' tax-related payout preferences. Specifically, stock options, which are not dividend-protected, can deter selfinterested executives from using dividends as a form of payout. In contrast, restricted stock, which is dividend-protected, is more likely to induce the use of dividends. Relatedly, shareholders' preferences for dividends, which are taxed as ordinary income, can depend on the income tax consequences of dividends relative to those of long-term capital gains. To test our hypothesis, we investigate whether the exogenous changes in shareholders' tax-related payout preferences following the 2003 dividend tax rate reduction result in predictable shifts in executive stock-based compensation and in managers' payout choices. Consistent with our prediction, we find a positive relation between the increased use of dividends in firms' payouts and the increased (decreased) use of restricted stock (stock options) in executive compensation, particularly for firms with a greater percentage ownership by individual investors and with lower costs associated with modifying the structure of their compensation plans. Our investigation of the role of shareholders' tax-related payout preferences in the design of executive stock-based compensation extends the prior literature that has largely focused on the role of incentive contracts in inducing managerial effort, risk taking, and retention.

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Investor Tax Heterogeneity and Ex-Dividend Day Trading Volume - The Effect of Dividend Yield and Institutional Ownership

Cited by 4 publications

References 37 publications

Taxes and Ex-day Returns: Evidence from Germany and the U.K.

Taxes and Ex-day Returns: Evidence from Germany and the U.K.

A Review of Taxes and Corporate Finance

Executive stock-based compensation and firms’ cash payout: the role of shareholders’ tax-related payout preferences

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