The Ex‐dividend Day Behaviour of REITs: Tax or Market Microstructure Effects

Abstract

We examine the importance of the tax and microstructure theories in explaining the ex‐dividend day behaviour of US REIT stock prices in three tick size regimes − the 1/8th, 1/16th, and decimal eras. We present a new theory that shows how the tax and microstructure effects interact to produce the observed ex‐dividend day behaviour. Our theory also shows why in an era of a large tick size, as in the 1/8th era, the tax effects fail to get detected and the observed ex‐dividend day behaviour could be misinterpreted as resulting solely from the microstructure effects.