Tick size, NYSE rule 118, and ex-dividend day stock price behavior

Jakob, Keith; Ma, Tongshu

doi:10.1016/s0304-405x(03)00189-2

Cited by 82 publications

(86 citation statements)

References 14 publications

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“…These results therefore provide sufficient evidence to show that our primary results, which reveal significant differences in the PDR measures in the pre-Act period vis-à-vis the post-Act period, are not driven by market-microstructure explanations. Our results are consistent with the findings of Graham et al (2003), Jakob and Ma (2004) and Cloyd et al (2006), that market microstructure explanations are not able to fully explain the anomaly of the ex-dividend day price drop.…”

Section: Market Microstructure Explanationsupporting

confidence: 89%

Ex-dividend prices and investor trades: Evidence from Taiwan

Chen

Chow

Shiu

2013

Pacific-Basin Finance Journal

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Based upon an examination of 987 ex-dividend events that took place on the Taiwan Stock Exchange between January 1992 and December 2006, we find that differential taxes are an important factor in terms of their effects on share prices and the behavior of investors around the ex-dividend day. Ex-day price drop ratio increases with the average investor's preference for dividend relative to capital gains. Excess volume around the ex-dividend day is positively correlated with the degree of tax heterogeneity and the gains from dividend-capturing activities, and is negatively associated with arbitrage risk and transaction costs. We also find that wealthy investors sell shares cum-dividend, subsequently reversing to buy shares on the ex-dividend day, whereas less wealthy investors, proprietary traders and corporate shareholders trade in the opposite direction.Overall, our results provide support for the dynamic dividend clientele hypothesis. JEL classification: G35

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Section: Market Microstructure Explanationsupporting

confidence: 89%

Ex-dividend prices and investor trades: Evidence from Taiwan

Chen

Chow

Shiu

2013

Pacific-Basin Finance Journal

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“…Kadapakkam's (2000) results reporting ex-dividend price drops near one after the introduction of electronic settlement in Hong Kong support Frank and Jagannathan's hypothesis. More recently, Jakob and Ma (2004) find that, contrary to Bali and Hite's hypothesis, after eliminating price discreteness the ex-dividend day anomaly strengthens. They also report that around ex-dividend dates bid prices fell by more than ask prices, supporting Frank and Jagannathan's hypothesis.…”

Section: Introductionmentioning

confidence: 70%

Ex-Dividend Day Returns When Dividend and Capital Gains are Taxed at the Same Rate

2011

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Due to the overwhelming international evidence that stock prices drop by less than the dividend paid on ex-dividend days, the ex-dividend day anomaly is considered a stylized fact. Two main approaches have emerged to explain this empirical regularity: the tax-clientele hypothesis and the microstructure of financial markets. Although the most widely accepted explanation for this fact relies on taxes, the ex-dividend day anomaly has been reported even in countries where IntroductionUnder perfect capital markets, the price of a share should drop by exactly the dividend per share paid on ex-dividend days. Nevertheless, researchers consistently report that prices fall by less than the dividend per share paid. The results are similar across countries and do not depend on the period investigated. This behavior constitutes an empirical regularity of stock returns that has been defined as the ex-dividend day anomaly. In a pioneer investigation with a small sample of companies quoted in the New York Stock Exchange, Campbell and Beranek (1955) reported that stock prices adjusted by less than the dividend paid. They observed that prices dropped on average by 90% of the dividend paid on ex-dividend dates. The authors, however, did not offer any explanation for this anomalous behavior. Later, Elton and Gruber (1970) proposed a tax-clientele explanation for their similar finding that stock prices dropped on average by 77.7% of the dividend paid. The authors suggested that, since dividends were usually taxed at higher rates than capital gains, the drop of the stock price should be smaller than the dividend paid to make investors indifferent between selling the stock cum-dividend and holding the stock, obtaining the dividend, and selling the stock ex-dividend. The greater the difference between dividends and capital gains tax rates, the smaller the price drop should be. In addition, the authors found that as the stock dividend yield increased, so did the price adjustment expressed as a percentage of the dividend per share. Such behavior supported their proposed tax-* The authors would like to thank two anonymous referees for their comments and suggestions.Finance a úvěr-Czech Journal of Economics and Finance, 61, 2011, no. 2 141 -clientele hypothesis: since those investors with relatively high tax rates would prefer to invest in low dividend yield stocks, these stocks should show a stronger tax effect than high yield ones, and therefore smaller price adjustments.Following Elton and Gruber (1970), many papers have carried out similar investigations in stock markets worldwide, most of them supporting the tax-clientele hypothesis for the reported less than one hundred percent price adjustment. Among these papers, we can mention Poterba and Summers (1984), Robin (1991), Graham et al. (2003), Zang et al. (2008), Amromim et al. (2008), and, more recently, Witworth and Rao (2010) for the United States; Athanassakos (1996) for Canada; Hayashi and Jagannathan (1990) for Japan; Poterba and Summers (1985) for the United Kingdom; a...

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“…Observing the serial correlations of residuals in the OLS model of Bali and Hite (1998), Jakob and Ma (2004) applied fixed effect panel regression of price drops on dividends and discreteness. They observed that the significant slope coefficient was always different from 1.…”

Section: Review Of Literaturementioning

confidence: 99%

Derived signals for S & P CNX nifty index futures

Kumar

2017

Financ Innov

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Background: The financial futures market in India is relatively new. The major advantage of derivatives as financial products is that their use minimizes the risks associated with securities. However, hedging effectiveness requires understanding key market signals such as trading margins, credit availability, and price discreteness. Results: In the first stage, it was observed that returns and trading margins, as well as credit availability, were cointegrated, thereby indicating a long-term relationship between them. In the first stage of the V-IGARCH (1, 1) model, heteroscedasticity with the mean returns through residuals was observed, where the estimated coefficients were negative. This finding indicated that maximizing returns requires efficient use of trading margins as well as availability of credit positions. From the second stage regression estimation, it was observed that trading prices and total money supply were directly related, and thus had direct effects on returns. The total money supply increased gradually until the last trading hour. In the conditional variance equation, total money supply was related negatively to the availability of credit for market participants. Under these circumstances, the efficient interbank call interest rate was necessary to maintain the trading margin. In effect, efficient Nifty returns would be achieved.

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Tick size, NYSE rule 118, and ex-dividend day stock price behavior

Cited by 82 publications

References 14 publications

Ex-dividend prices and investor trades: Evidence from Taiwan

Ex-dividend prices and investor trades: Evidence from Taiwan

Ex-Dividend Day Returns When Dividend and Capital Gains are Taxed at the Same Rate

Derived signals for S & P CNX nifty index futures

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