Limit Order Adjustment Mechanisms and Ex-Dividend Day Stock Price Behavior

Abstract

Unlike the NYSE, the Toronto Stock Exchange (TSX) does not adjust prices in the outstanding limit orders on ex‐dividend days. We find that TSX ex‐day stock price behavior differs from that on the NYSE in several key aspects. In each case, the TSX ex‐day behavior is consistent with the lack of a limit order adjustment mechanism. Our findings confirm that market microstructure is an important factor that contributes to the observed Canadian ex‐day price behavior. Our findings also resolve the puzzle of the relatively small ex‐day price drop in Canada.

Ex-dividend returns: The Mexican puzzle

“…14 5.5.3. Procedures for handling limit orders Dubofsky (1992) and Jakob and Ma (2005) conclude that procedures for handling limit orders affect ex-day returns. However, market procedures for handling limit orders cannot explain the observed positive ex-day returns in Mexico.…”

“…Since July 2002, similar to the procedures followed on the Toronto Stock Exchange (Jakob and Ma (2005)), the Mexican stock exchange allows stale buy and sell limit orders on cash-dividend paying stock to stay in the books on the ex-day without any adjustments. In this time period, there are 135 events with an average Abnormal volume is daily volume less the average number of shares traded during the control period of 55 days prior to the event window.…”

Intraday Analysis of the Limit Order Bias at the Ex-Dividend Day of U.S. Common Stocks

“…On the other hand, limit orders to sell (at the ask) are not consistently reduced by the ex-cash dividend amount. 3 The author argued that, the asymmetric adjustment of open limit orders on exdays under the NYSE and AMEX rules is sufficient to create ex-day abnormal returns under three assumptions: (i) the cum-dividend day closing price is the mean of the best bid and ask quotes specified by open good-till-canceled buy and sell limit orders, 3 As pointed out by Jakob and Ma (2005), even if there were no adjustment at either limit orders to buy or limit orders to sell at the ex-dividend day opening, investors who place limit buy orders at the bid have greater incentives to adjust their orders for the dividend than investors who place limit sell orders at the ask. This is because on the bid side, limit order traders would prefer to buy at the lower adjusted price whereas on the ask side limit order traders would not voluntarily pursue to sell their stocks at a price reduced by the dividend amount, although such an initiative would result in the fair valuation of the stock price on the exdividend day.…”

“…As correctly pinpointed by Ma (2004), Dubofsky's (1992) Jakob and Ma (2005), who investigated the ex-day anomaly for stocks in the Toronto Stock Exchange (TSX) where there is no adjustment mechanism for open limit orders, nominate the "limit order adjustment hypothesis" as the only, among the tax hypothesis (Elton and Gruber (1970), Elton, Gruber and Blake (2005)), the transaction cost hypothesis (Kalay 1982) and the other abovementioned microstructure hypotheses, that could explain the Canadian ex-day puzzle.…”

“…Dubofsky (1992) commented that, most likely, the abnormal returns created by the limit order exchange rules at the ex-day open will persist until the ex-day close, primarily in samples of low-yielding, thinly traded stocks. In relation to this, Jakob and Ma (2005) formally tested whether higher trading volumes, dividend dollar amounts or dividend yields have any power in reducing the abnormal returns generated by the asymmetrical limit order adjustment. They found that it is only trading volume created by active trading during the ex-dividend day that significantly reduces the ex-day abnormal returns.…”