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

Abstract

We explore the impact of market structure on the ex‐day price anomaly. Measuring the price‐drop ratio (PDR) as the ratio of the price change on the ex‐day to the dividend amount, we find that the average NASDAQ PDR is significantly less than one and significantly less than the New York Stock Exchange (NYSE) PDR. We then investigate a subset of firms that voluntary switch from NASDAQ to the NYSE and find that the PDR significantly increases after the switch, suggesting that market structure affects PDRs. We also create a matched sample and find that the NASDAQ PDR converges toward its matched NYSE counterpart, particularly after the introduction of SuperMontage. Our evidence is consistent with significant NASDAQ market structure changes reducing execution cost differences between the two exchanges and, in turn, reducing the PDR difference. Overall, our results highlight the important role market structure can play in understanding anomalies.

Nasdaq ex‐day behavior: An out‐of‐sample test

“…We make several contributions to the literature. Firstly, we document that Nasdaq PDRs are substantially smaller than that previously reported for NYSE firms, although this difference has shrunk in recent years (Mortal, Paudel, & Silveri, ). Nonetheless, the level of Nasdaq PDRs is still too low to be fully explained by traditional theories.…”

“…The post‐2002 subsample corresponds to a period in which the tax rates on dividends and capital gains are essentially equal, transaction costs are at historically low levels (e.g., minimum tick size of a penny for most stocks, discount brokers offering trades for less than $10, etc. ), and Nasdaq PDRs having converged with NYSE PDRs (Mortal et al, ). For the post‐2002 subsample, we find that while the Nasdaq PDR has increased to 68%, it is still well below one, both statistically and economically.…”

“…A related paper to ours is Mortal et al (), who mainly study the difference between Nasdaq and NYSE PDRs through time. They find that the PDR difference between the two exchanges shrinks as the way that stocks trade across the two exchanges converges after 2002.…”

Where does ex‐dividend trading occur: An examination of trading venues around dividends

“…We follow Mortal et al (2017) and measure the PDR as the difference between the closing price on the cumdividend date and the closing price on the ex-dividend date scaled by the dividend paid on a per share basis. The formal calculation is provided below:…”

“…Conversely, when transaction costs are low, short-term dividend arbitrage traders will increase the PDR closer to one. Although Mortal et al (2017) show that PDRs are comparable between NASDAQ and NYSE-listed stocks after introduction of SuperMontage, we control for the stock's primary listing exchange to see if the listing exchange impacts the ex-day price drop. Finally, we control for the stock's firm size and trading volume.…”